Saturday, December 29, 2012

Means testing might yield faster deficit savings than gradual changes for future retirees


Congress is unlikely to look very much at entitlements this New Year’s weekend as it tries to ponder emergency legislation to avoid the “Fiscal Cliff”.
  
It’s important to remember, however, that the biggest savings in entitlement spending could come from relatively sudden changes.

Reducing the use of “fee for service” and reforms to discourage unnecessary tests and treatments may reduce costs and do the least harm to patients (actually leaving patients alone might do some good).  But down the road is rationing of procedures for people over certain ages.  “It’s no longer your turn”.

Means testing on Medicare premiums might be moderately effective, but about 5% of a seniors pay higher premiums now.  And wealthiest healthy  seniors might indeed find private plans (Advantage) cheaper.  Republicans say they want this, but it might deprive Medicare of premium revenue from seniors who use it relatively less.

On Social Security, the unpleasant and inconvenient truth is that means testing now even of existing better-off beneficiaries might yield more savings than gradual changes in retirement age or in cost of living calculations (the chained CPI debate).

If we really go over the debt ceiling (after “Timocracy” methods to stave it off for two more months), it could turn out that Social Security beneficiaries are the first to take the hit after all.  That’s because of the 1960 Supreme Court opinion (Flemming v. Nestor) denies the claim of a “property right” to an annuity based on contributions, which could lead contractors to sue that they are first in line.  If benefit payments were missed, they might not be legally recoverable.

One grim and inconvenient possibility is based on a form of “means testing” already in effect for early retirees, the maligned “Annual Earnings Test”.  It could be extended past full retirement age.  It could be extended to incorporate investment income, other pensions (which are already compromised by the “social security offset”) or even inherited money, distributed any time within a reporting year or possibly previous years.  It could take the form of a “2:1” reduction, or even total exclusion.  And unlike the current AET for early retirees, it would not save rights for future benefits after a later age.
  
Means testing could also penalize seniors who did not take early retirement more.  Social Security has already stopped the privilege of turning in benefits and allowing it to be restarted later at higher benefit rates. 
There are ways for the skies to fall in the first part of 2013, whatever Congress does this weekend. 

Friday, December 28, 2012

Estate tax could jump suddenly unless Congress acts in 2013


NBC News has a wicked story from CNBC, by John Carrey, “Death and (estate) taxes sometimes go together”, link here

The issue is that, without action by Congress, a death in 2013 will lead to the old inheritance tax threshold of $1 million and a top rate of 55%.

It could matter to heirs whether a death certificate says 11:59 PM Dec. 31, 2012, or 12:01 AM Jan. 1.  For deaths in 2012, the exemption was 5.12 million.

But Congress has until Dec. 31, 2013 (not 2012) to fix this problem.  It doesn’t have to agree to anything right now for the Fiscal Cliff.   But families or heirs could be kept in suspense.
  
My own belief is that, in policy matters, changes should occur gradually and incrementally to avoid sudden catastrophic discontinuities which can throw people under the bus.  Congress’s practice of defining tables of threshold amounts for some years and stopping, rather than automatically indexing them, causes this kind of crisis.  A similar problem exists with the AMT (Alternative Minimum Tax).
Imagine a Hitchcock movie based on this problem.


Thursday, December 27, 2012

CNBC analyzes the "ugly" fixes to social security: reduce spousal survivor benefits?


NBC News and CNBC have a primer on how to fix Social Security – “but it won’t be pretty” or “it may get ugly”, by Allison Linn, link (website url) here.

All the familiar proposals are included, such as raising the FICA limit, the FICA rate, gradually increasing eligibility age, and using a chained CPI.

Of course, means testing is mentioned.  And almost no one discusses when means testing starts, only at some point in the future, or even for current retirees? 

There seems to exist a philosophical disagreement as to whether social security is “insurance” against old age poverty, or whether it should be a viewed as an annuity related to FICA “premiums” paid.  The 1960 Supreme Court ruling on the subject does not comfort those who made years of contributions already.

A new wrinkle is to dial down benefits for married surviving spouses (yes, even straight spouses) because two  income families are so much more common.

Changes in retirement age might affect poorer people more, because they don’t live as long. But a chained CPI would affect the very elderly poor the most.  

Tuesday, December 18, 2012

A chained CPI could hit seniors who live a long time; more on the Supreme Court and on the "Ponzi" idea


Ed O’Keefe and Dylan Matthews, in an article Monday December 17, 2012, explain (in the Washington Post)  how switching the inflation adjustment formula on Social Security to a “Chained CPI” (or “Chained Consumer Price Index” could affect beneficiaries.  Over time, a typical beneficiary could see his or her beneficiary check be about 5% less than it would have been in about ten years.  This could add up for beneficiaries who live a long time.  President Obama has proposed compensating with a slight step-up at age 85.  The Chained CPI reduces inflation rate by assuming people tend to buy generic brands over time as major brand prices increase, or will migrate to cheaper but similar products (probably not to pigs' knuckles).

The link for the story is here.

 There is more to say the recent discussions of an old Supreme Court ruling that denies a property right to FICA contributions.  When people and employer pay FICA (or self-employment) taxes, the government uses the taxes collected to pay current beneficiaries, and has (when there was a surplus) lent it to other governmental operations.  When new people retire and the government starts paying them benefits, it must, in a Ponzi-like chain letter, “borrow” from current workers to keep making payments.  People are living longer, and for a variety of cultural reasons, not having as many children to provide workers to “loan” the money, although immigration has, until just recently, made up for some of the gap.  In a situation where the debt ceiling is exceeded, there could a  legal case that in fact social security benefits might not be paid (at least those with other means).  I would like to see Congress hire an insurance annuity contractor (like Vantage) to make the actuarial calculations and carve out a legal property right for some of the benefits based on actuarial math.  

When people make FICA contributions and expect to be paid back in their own retirement, there's another part of the deal that we miss:  providing another generation that is capable of paying us back!

Monday, December 17, 2012

AARP published "15 Medicare Proposals You Should Know About" in its "Earned a Say" column


The AARP has a web reference to the “15 Medicare Proposals You Should Know About” in its “You earned a say” series, here.  (See a similar story about Social Security Nov. 27.) 

Medicare is generally seen to be a bigger problem in entitlement budgets that Social Security, and even less of it is covered by pre-paid special taxes.

It’s easy to see problems with most of the major proposals.  Gradual raising of the Medicare eligibility age won’t do much to reduce expenses in the short run. Seniors would have to fend for themselves (or deal with their last employers and COBRA or retiree policies), but that may be inevitable as lifespans raise.

Since highest income seniors already pay more for Part B and D supplementals, raising their premiums with means-testing would eat further into the middle class.

I think there is an opportunity to encourage providers not to order unnecessary tests.  My recent dental surgery resulting in a biopsy, which was justified by ruling out malignancy,  but probably added $1000 or so to Medicare’s bill for a test that was largely unnecessary.  I think I am prudent in the way I use services, taking advantage of generics and informing myself of the enormous volume discounts hospitals and providers can give  large insurance companies.  I try to ask about prices and competition. But it is very hard to control what providers insist on doing, even with relatively healthy beneficiaries.  We need to think seriously about reforming fee for service.  Like it or not, health care is a business.

AARP has some petitions for visitors to sign, but I think that form petition letters are self-serving and ineffective. 

Another proposal would be that the government no longer indemnify providers when patients don't make copays. 

Thursday, December 13, 2012

Another look at Supreme Court's 1960 opinion suggests that Social Security is more like "welfare" than an "annuity", a dangerous idea now


I looked some more at the 1960 Supreme Court opinion “Flemming v. Nestor” at the Court’s reason *see Dec. 3 posting). 

The Court noted that Congress set up Social Security through normal democratic political processes with the intention of its continuing “indefinitely”, and that to keep it sustainable, Congress needs to be able to adjust it.  It also says that voters generally have understood it as a kind of disability and retirement insurance, not a contractual annuity.
   
It also notes that benefit amounts are more closely tied to earnings (at least they were in 1960) than to FICA contributions themselves (a notion more relevant during Social Security’s early days), an idea that would be consistent with a hybrid product.  The concept seems to have been to continue some semblance of a standard of living that the recipient had earned while working (including that lifestyle for spouses).  It also notes that Social Security normally limits benefits until full retirement age based on means with an Annual Earnings Test, which in 1960 could be as late as 72 (I wasn’t aware of that). 

All of this would tend to point to a legal justification to withholding benefits even from current beneficiaries under a fiscal emergency, based on means.  It is possible to imagine this happening after a default due to a debt-ceiling excess, or possibly even as a fallback if there is no Fiscal Cliff solution.

Some members of the GOP and the Heritage Foundation have sounded cavalier in their public statements, that people like them didn’t “need” benefits and should give them up.  That’s scary, because that can lead to a dangerous assessment of “need” along any ground imaginable, a problem well known in libertarian thinking. 
It’s not clear how much money is saved by gradually raising retirement ages for Medicare and Social Security, by further means testing Medicare premiums (maybe driving more seniors to private plans), or  by being less generous with COLA’s.  These measures wouldn’t help with short term deficits or immediate debts.  It would be possible to provide calculations on means testing of current beneficiaries in different levels, as well as to perform actuarial calculations based on actual FICA records and scale payments back accordingly.  These sorts of numbers should be made known to the public.
 "
Means testing could be based on income (and an obvious, innocuous place to start is to tax the benefits as ordinary income). A more sinister idea, well known to people with exposure to the ideology of the far Left a few decades ago, would be to look at estates or accumulated wealth.  Wealth could be inferred from investment income (that is, non-wage, in contradiction to the Annual Earnings Test which does not consider investments), or by more intrusive methods, to look at estates that have been probated or passed in trusts in the last so-many years.  This gets the government into areas that most people (me, at least) would not want it to be.  But that’s another reason why I’m astonished at statements by Lindsay Graham and others that better-off people should just do without their benefits in order to help the deficit.  That’s a very slippery slope, that could suddenly become a legal trap for everyone.  I think some members of the GOP don’t see what they’re inviting.  

Wednesday, December 12, 2012

Family caregivers often neglect own health



NBC News has a story December 11, 2012 that echoes the increasing burden on family caregivers as the elderly live longer with crippling disabilities, including Alzheimer’s Disease. 

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The problems extend well beyond surviving spouses, to other adult children, often said to be caught in the “sandwich generation”.

As caregivers neglect their own health, they will create a feedback cycle that intensifies for the next generation. 

When I was growing up, nobody talked about problems like this.  When elderly people became seriously ill, they typically did pass away soon, and families moved on with the next generations.   

Increasing life spans, often with grave disability, coupled with fewer children, makes up one of the gravest sustainability problems that we have.  

Picture: My own maternal grandmother, in Kpiton Ohio, around 1960.  She passed away at age 80 in 1969. 

Wednesday, December 05, 2012

Surviving spouses under 62 are losing homes that had reverse mortgages


ABC News is reporting that spouses of seniors who pass away after taking out reverse mortgages are sometimes losing their homes if the spouses are under 62.  It appears that the spouses must come up with the cash immediately or the house can be sold right out from under them, even after death notices appear in the newspapers.

The story by Jim Avila and Serena Marshall is here

In some cases, refinancing options are possible, but apparently only when the spouse turns 62.

It would be interesting to follow what is happening with same-sex spouses (even if over 62).

A story posted here March 29, 2011 indicates that HUD rules promulgated then could be complicating the problem.  
  
A house belonging to a trust normally cannot get a reverse mortgage.  

Monday, December 03, 2012

Supreme Court, in 1960, said that retirees don't have a "property right" to Social Security benefits based on their FICA contributions; another argument for means testing?


Here’s an obscure fact for the ABC “Millionaire” game whose consequences may not be so trivial. The Federal Insurance Contributions Act tax (FICA), which most wage earners pay to fund Social Security (usually with employer match), does not confer a “property right” (to use Cato-like, libertarian parlance) to promised future benefits from Social Security.  This point is made in the Wikipedia article on FICA, well worth reading, link here.

The Supreme Court case that is relevant is Flemming v. Nestor in 1960, with the Opinion available on FindLaw here

The Social Security Administration has an informative page on this matter here

The plaintiff had been denied benefits, despite his contributions, in 1954 because he had been deported and had been a member of the Communist Party. (Yes, in the 1970s, I remember tables from “The Party” right in front of the West 4th Street Subway station in NYC.)

The Social Security Administration on this page admits that Social Security benefits are an entitlement, subject to the (political) determinations of Congress, and not a contractual right or property.
In one sense, that may feed arguments in some circles that all benefits should be means tested, even for current beneficiaries, in a fiscal emergency.  As far as the Supreme Court is concerned, it is conceivable that future retirees could get zero benefits (especially wealthier ones), even if that is not what we think should happen. 

The legal case also has another alarming potential corollary.  Should Congress not extend the debt ceiling (the next deadline is in February, 2013, probably), the treasury could delay or deny existing benefits, and Social Security beneficiaries, who would certainly try to sue under class action, could not be guaranteed winning in court (as I had thought in 2011) because of this precedent. In worst case scenarios, some benefits could be lost permanently.

In a column in the Washington Post Monday, December 3, 2012 Robert Samuelson argues, on p A19, argues in a column called “Bad-Faith Bargaining”, orders “Put Social Security on the table – clearly and irrevocably.”  The consequences seem vague until the end of the piece, where he does argue for gradualism in changing the inflation-adjustment formula, taxing Social Security benefits as ordinary income (at least for higher earners), and raising the retirement age more rapidly than before.  His link is here.  I would add that it makes no sense at all to continue the 2% FICA tax "holiday" in 2013 given these problems,  

While these incremental changes seem appropriate as part of a “deal”, I don’t know how effective they will be.  I am left with the queasy feeling that my entire Social Security benefit could be yanked away as part of an emergency because I seem to have other resources.  Why shouldn’t it be my turn to be unlucky?  (I get this out of some of the unwelcome proposals that people make to me, given their knowledge of my generational karma.)   Any change will stiff some people.

I do have a “modest proposal”.  I would like to see an actuarial calculation of the benefit that would be paid based on FICA contributions (including employer match, or the “self-employment” tax explained in the Wikipedia article) had these “contributions” instead been made to purchase a private annuity from a life insurance company.  One immediate complication is that life spans increasing, which would make a justifiable lifetime annuity benefit less.  Indeed, private insurance companies may be finding the rapid increase in longevity (sometimes with heroic medical tricks) a real challenge for them.  Another problem would be that something would have to be subtracted from the monthly benefit to make up for the fact that in the 1930s the original beneficiaries had contributed nothing. 

I could propose, pass a law that gives me legal contractual right to that amount and nothing more.  In other words, partially privatize.  Maybe it would go back to being tax free. 

Then there is still another problem.  There is still a presumption that the government has “borrowed the money” from me (and, I'm afraid, spent it on other things and just wrote soem IOU's back to Social Security).  A life insurance company has to account for the annuity premiums collected in a specific way that protects the ownership rights of the policyowner (hence the word “owner” – and performing  these accounting calculations are a very big deal in life insurance valuation I.T. systems like Vantage  -- no wonder that company “rules the world”)   Remember, too, that in the insurance world, some products have “value” (like Whole Life) and other cheaper policies (term) are really just “insurance”.   That raises still another philosophical question about the intention of FICA (however regressively it was set up): is it really a premium for a pseudo-annuity, or is it “insurance” against old age poverty (that is, welfare).  In any case, if we accept the idea that the FICA tax payment amounts to an annuity premium payment for a “hybrid” concept (insurance and annuity, which is somewhat progressive anyway in that lower income retirees do get a little bit of a break compared to typical annuity payouts), we have to deal with the fact that the government will have trouble collecting enough “premiums” from current and future workers to pay back even this actuarial amount owed.  That’s because the birth rate is lower, and also because middle class wages have not risen properly in recent years.   (Ever since Sandy, “hybrid” has become a bad word.)

Still, I think that doing this calculation and informing all beneficiaries where they stand now is an important first step to reform.  And that reform should include some partial ownership rights, beyond the reach of politicians. 

The Young Turks talk about Boehner’s proposal in 2010 to stop all benefits to wealthier people, regardless of what they put in:


The FICA (and related self-employment) tax is not an effective vehicle for helping just the poor in old age.  From the way it was set up, it sounds as if that was not the intention, regardless of the Flemming Supreme Court case in 1960. Responsibility for the elderly poor (who sometimes collect no Social Security now) is then in some sense a wealth redistribution question that cannot escape political consequences.  It belongs in the debate of general tax policies, as well as family law (like filial responsibility laws), and volunteerism.  Admittedly, the problem makes us ask very basic questions about family and marriage.  

Saturday, December 01, 2012

AARP promotes open enrollment of Medigap, Medicare Advantage, Part D


AARP has been advising members, and the public, of open Medicare enrollment, apparently for Medigap (Supplemental), Medicare Advantage (which replaces Medicare) and Part D plans, through Dec. 7.
   
The link with the explanation of the open enrollment is here.

The page has a sublink that in turn explains the differences between Medigap (for people on conventional Medicare) and Medicare Advantage.  The latter replaces the entire coverage (including prescriptions).  It may well be cheaper for healthy seniors with high incomes who have to pay higher Medicare premiums under current means testing rules.  In that sense, it may well provide some credibility for Paul Ryan’s proposals to “privatize” Medicare before the election.

I have been approached, in retirement, a couple times to sell these products (as well as long term care).  I do not want to do this, because if I write about things (as a journalist) I cannot be partial to one company or one kind of product.  This is a very important point to me which I will cover again soon.

AARP reports that Medicare Advantage is increasing in sales and popularity despite Obamacare.