More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

Full bio and recent public appearances | Research archive at CBPP.org


Reassessing a View on Federal Accounting

September 26, 2014 at 1:55 pm

So-called “fair-value accounting” is misguided because it would make federal loan and loan guarantee programs look more expensive than they really are, as my colleague Richard Kogan and I have explained.  Jason Delisle and Jason Richwine, writing in the latest issue of National Affairs, correctly note that the logic of our argument is inconsistent with a 2005 CBPP analysis of proposals to invest part of the Social Security trust funds in stocks instead of Treasury bonds.  We concur.  We have re-analyzed our assessment of investing a portion of the Social Security trust fund in equities and now come to a different conclusion than we did in 2005.

The current method of accounting for federal credit programs fully records — on a present-value basis — all the cash flowing into and out of the Treasury.  In contrast, fair-value accounting would add an extra amount to the budgetary cost, based on the fact that loan assets are somewhat less valuable to the private sector than to the government for several reasons: businesses must make a profit; they can’t put themselves at the head of the line when collecting a debt; they borrow at higher interest rates; and private-sector investors are risk-averse — they dislike losses (in this case, higher-than-expected loan defaults) more than they like equal, and equally likely, gains (lower defaults).  None of these factors represents an actual cost that the government incurs when it makes loans.

Including in the budget a cost that the government does not actually pay would overstate spending, deficits, and debt, making the federal budget a less accurate depiction of the nation’s fiscal position.  It would also treat different federal programs inconsistently, because it would not make a similar adjustment for non-credit programs whose costs are also uncertain and variable.  In a recent article, New York University law professor David Kamin thoroughly explains why “including the cost of risk would skew budget estimates.”

Proposals to invest the Social Security trust funds in the stock market raise similar issues.  Stocks produce higher returns than Treasury bonds on average over the years, but they also entail a greater risk of losing money.  That risk is an important consideration in assessing the pros and cons of a proposal, but it’s not an actual cost to the government and therefore doesn’t belong in the budget.  This conclusion differs from the one CBPP reached in 2005, which, upon further consideration, we now believe was mistaken.

(Proposals to replace Social Security with private accounts are very different, since individuals, rather than the government, would bear the risk of holding their retirement savings in stocks.  Individuals are rightly risk-averse.  As a result, any analysis of their well-being — as distinguished from analysis of the impact on government finances — should account for the variability of the stock market.)

Census Report Shows Rise in Full-Time Work, Undercutting Claims by Health Reform Opponents

September 17, 2014 at 9:55 am

Yesterday’s Census Bureau report shows that the share of workers with full-time, full-year work rose in 2013, while the share with part-time, part-year work fell.  This finding further undercuts assertions that health reform is causing a large increase in part-time employment — as proponents of a House measure to change health reform’s rules on covering full-time workers claim.

Health reform requires employers with at least 50 full-time-equivalent workers to offer coverage to full-time employees — defined as those who work at least 30 hours a week — or pay a penalty.  Critics claim that employers are shifting some employees to part-time work to avoid offering them health insurance.  But the data provide scant evidence of such a shift.

To the contrary, part-time work became less frequent last year.  “An estimated 72.7 percent of working men with earnings and 60.5 percent of working women with earnings worked full time, year round in 2013, both percentages higher than the 2012 estimates of 71.1 percent and 59.4 percent respectively,” according to the new Census report.  These data are consistent with a recent Urban Institute analysis that found little evidence that health reform has increased part-time work.

The share of involuntary part-timers — workers who’d rather have full-time jobs but can’t find them — tells a similar story.  If health reform were distorting hiring practices, as critics assert, we’d expect the share of involuntary part-timers to be growing.  Instead, as the chart (based on Labor Department data) shows, it’s down by 1½ percentage points from its post-recession peak.  My colleague Jared Bernstein finds that this pattern is typical for this stage of a recovery.

Later this week, the House will consider a proposal (part of a so-called “jobs bill”) to raise health reform’s threshold for full-time work from 30 to 40 hours.  But this step would make a shift toward part-time employment much more likely — not less so.

Only about 7 percent of employees work 30 to 34 hours (that is, at or modestly above health reform’s 30-hour threshold), but 44 percent of employees work 40 hours a week and thus would be vulnerable to cuts in their hours if the threshold rose to 40 hours.  Employers could easily cut back large numbers of employees from 40 to 39 hours so they wouldn’t have to offer them health coverage.

If you exclude workers at firms that already offer health insurance and thus won’t be tempted to cut workers’ hours, more than twice as many workers would face a high risk of reduced hours under a 40-hour threshold than under the current 30-hour threshold, according to New York University economist Sherry Glied.

There’s little evidence to date that health reform has caused a shift to part-time work.  There’s every reason to expect the impact to be small as a share of total employment, as we have explained.  And raising the cutoff for the employer mandate from 30 to 40 hours a week would be a step in the wrong direction.

“Generational Accounting” Spreads Confusion

August 1, 2014 at 1:05 pm

“Generational accounting” purports to compare the effects of federal budget policies on people born in different years.  But, contrary to economist Lawrence Kotlikoff’s New York Times op-ed promoting a bill requiring federal agencies to adopt the practice, generational accounting is far more likely to obscure than illuminate the budget picture.

Kotlikoff helped develop generational accounting over 20 years ago.  It was supposed to provide useful information missing from standard budget presentations.  It doesn’t do that, however, and few budget analysts use the approach.

Generational accounting rests on several highly unrealistic assumptions, as our detailed analysis explains.  It doesn’t account for the benefits that government spending can have for future generations (for example, education and infrastructure spending that raises living standards).  It also ignores the fact that our children and grandchildren will be richer than we are and have more disposable income, even if they pay somewhat higher taxes.

Generational accounting’s most serious flaw may be that it requires projecting such key variables as population growth, labor force participation, earnings, health care costs, and interest rates through infinity.  Budget experts recognize that projections grow very iffy beyond a few decades — and spinning them out to infinity makes them much more so.  The American Academy of Actuaries describes projections into the infinite future as “of limited value to policymakers.”

The Congressional Budget Office, the Center on Budget and Policy Priorities, and other leading budget analysts focus instead on the next 25 years or so, which amply documents future fiscal pressures and presents a reasonable horizon for policymakers.  These organizations produce simple, straightforward long-run projections that show the path of federal revenues, spending, and debt under current budget policies.  In that way, they show clearly what’s driving fiscal pressures, and when (see chart).

Policymakers should certainly look beyond the standard ten-year horizon of most budget estimates, but they already have the tools to do that.  Generational accounting is hard to interpret and easily misunderstood, and including it in the federal government’s regular budget reports and cost estimates would be a mistake.

Social Security’s #1 Priority: Raise Share of Payroll Tax Going to Disability Insurance

July 29, 2014 at 4:49 pm

The Social Security trustees’ new report shows why the program’s immediate priority should be to raise the share of payroll taxes allocated to Disability Insurance (DI) and lower the share allocated to Old-Age and Survivors Insurance to keep the DI trust fund from running out in 2016.  Nine million disabled workers face a 20 percent across-the-board cut in DI benefits if the trust fund is depleted.

Social Security’s disability and retirement programs are closely linked, so ideally Congress would address DI’s finances as part of a long-term solvency package for Social Security as a whole — one that extends the solvency of both trust funds well beyond 2033, when the combined trust funds face exhaustion.  Enacting a balanced solvency package before late 2016, however, is highly unlikely.

Surveys find that Americans are willing to pay higher Social Security taxes to preserve and strengthen Social Security for future generations.  Yet some politicians argue for preserving solvency solely through benefit cuts.  Bridging such sharp divisions will be difficult, and holding DI beneficiaries hostage by refusing to reallocate payroll taxes wouldn’t make the task any easier — or success more likely.

Reallocation is unavoidable.  Even if policymakers miraculously agreed on a balanced solvency package by 2016, any changes in DI benefits or eligibility would phase in gradually and hence do little to replenish the DI trust fund by 2016.

Reallocation is a historically noncontroversial action that policymakers have often taken to shift resources between the two trust funds, in either direction.  Both the Bush and Clinton Administrations endorsed it in the early 1990s, and Congress enacted it in 1994 without a single dissenting voice.

Reallocation isn’t a “patch” or “kicking the can down the road,” as some contend — descriptions appropriate for the recent House-approved bill to extend the Highway Trust Fund by ten months, or Congress’ repeated one-year delays in implementing scheduled cuts in Medicare payments to doctors.  A payroll tax reallocation will keep Social Security’s disability and retirement programs solvent for another 15 to 20 years.

And reallocation doesn’t preclude additional actions to strengthen Disability Insurance.  Reversing the recent decline in Social Security’s administrative funding would allow the Social Security Administration to process claims more quickly and ensure that recipients remain on the rolls only as long as they are eligible.  Changes in the process for approving or denying claims might improve the accuracy and consistency of those disability determinations.  We could also test new strategies to help people with disabilities remain in the workforce, as the President’s 2015 budget proposed.

New Chart Book Paints Picture of Disability Insurance

July 21, 2014 at 1:53 pm

The Senate Finance Committee will hold a hearing this Thursday on Social Security Disability Insurance (DI).  We’ve just released a new chart book about DI.  Its more than 20 figures illustrate the essential facts and dispel some common misperceptions about this vitally important program.

For example, the following graph shows how growth in DI’s benefit rolls has slowed sharply.

The growth in the number of DI beneficiaries in recent decades stems largely from well-known demographic factors.  These include the growth of the population; the aging of the baby boomers into their 50s and 60s, which are years of peak risk for disability; growth in women’s labor force participation, which makes women much more likely to earn insured status for DI; and the rise in Social Security’s full retirement age from 65 to 66.

Both demographic and economic pressures on DI are easing.  In recent months, growth in the number of DI beneficiaries has slowed to its lowest rate in 25 years.  Social Security’s actuaries project that the program’s costs will level off as the economy continues to mend and baby boomers move from the disability rolls to the retirement rolls.

DI costs are projected to exceed revenues, however, and the program’s trust fund needs to be replenished in 2016.  Unless Congress increases the share of the Social Security payroll tax devoted to DI, beneficiaries would then face a 20 percent cut in benefits.

Reallocation between the DI trust fund and Social Security’s much larger Old-Age and Survivors Insurance (OASI) fund is a traditional method of addressing shortfalls in one program, and Congress should do so to avoid a harsh and unacceptable cut in benefits for an extremely vulnerable group.

For the full chart book, click here.