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

Health Costs Continue to Slow, Improving Budget Outlook

March 9, 2015 at 5:16 pm

With health care cost growth continuing to slow, the Congressional Budget Office (CBO) now projects that federal health spending will be nearly $700 billion less over the 2011-2020 period than what CBO projected in January 2010 — even with the subsequent enactment of health reform (see figure).

Lower projected health care spending has markedly improved the budget outlook, with CBO projecting that federal budget deficits through 2025 will be about $400 billion less than it projected in January.

“The largest factor underlying that reduction,” CBO says of its lower deficit projections, “is a downward revision in projected growth in premiums for private health insurance, reflecting the fact that spending by private health insurers on health care and administration rose less in 2013 (the most recent year for which data are available) than in preceding years and by much less than [CBO and the Joint Committee on Taxation (JCT)] had expected for 2013.”

This slowdown in health costs affects the budget outlook in three major ways.

  • First, slower growth in health insurance premiums will reduce the cost of the subsidies available to low- and moderate-income people who purchase coverage in the health insurance marketplaces.
  • Second, lower premiums will result in higher taxable wages for workers, thereby increasing income and payroll tax revenues.
  • Third, because premiums will be lower, fewer workers will be enrolled in employer-sponsored health insurance plans that would potentially be subject to the excise tax on high-cost plans (the “Cadillac tax”) that takes effect in 2018. CBO and JCT now estimate that revenues from the excise tax will be 41 percent lower through 2025 than they estimated previously.

Even if cost growth remains moderate, federal health spending will keep rising as more baby boomers become eligible for Medicare and Medicaid.  Making the health care system more efficient thus remains a major budget challenge.  But CBO’s latest projections confirm that we’ve already made substantial progress.

Few Disability Insurance Beneficiaries Could Support Themselves by Working

March 9, 2015 at 3:33 pm

The Social Security Disability Insurance (DI) program provides modest but vital benefits to workers who can no longer do substantial work due to a severe medical impairment.  Lawmakers will need to replenish DI’s trust fund by 2016 and may be tempted to curtail eligibility on the assumption that those affected could support themselves by working.  But a wide variety of evidence suggests that’s not the case.

DI not only permits but encourages beneficiaries to work.  The average benefit is only $1,165 a month — barely above the poverty line.  Beneficiaries can earn up to $1,090 a month indefinitely and still collect benefits; for an average beneficiary, that would roughly double his or her income.  Recipients may earn unlimited amounts for a year without jeopardizing their benefits, while they test their ability to return to work.  During the next three years, they may automatically return to the DI rolls if their monthly earnings sink below $1,090.  Beneficiaries who return to work and earn more than $1,090 a month may continue to receive Medicare coverage for up to 7½ years after their cash benefits stop.

Despite these and other work incentives, most beneficiaries do not have earnings.  One careful study found that only one-fifth of beneficiaries aged 45 to 64 — who dominate the DI rolls — have any earnings two years after application, and even fewer have significant earnings.  (See figure.)

Even those who apply for benefits and are rejected — because they don’t meet DI’s strict eligibility criteria — fare very poorly in the labor market.  Barely half have any earnings two years after application, and the average amount earned is very low.  In contrast, workers of the same age who don’t seek DI benefits are likely to work and have substantial earnings.

Economic analyses consistently find that, while receipt of DI somewhat reduces employment, its effect on earnings is small.  One widely cited study estimates that “marginal” beneficiaries — those who might plausibly have been denied (and who are thus healthier than the average beneficiary) — would earn only $3,800 to $4,600 more annually if they were not receiving DI benefits.

The Social Security Administration has also undertaken several demonstration projects over the years to test new ways to encourage DI beneficiaries to return to work, but they have shown limited results or proved not cost-effective.  “This large body of research has demonstrated the enormous difficulty of helping and encouraging people with chronic health conditions and disabilities to work and earn enough to become self-sufficient,” concludes a recent assessment.  None of the demonstrations has been found to have “the potential to lead to substantial caseload reductions.”

In short, there’s no reason to think that many DI beneficiaries could support themselves by working if lawmakers make deep cuts to the program.

“Generational Accounting” Is Misleading and Uninformative

February 24, 2015 at 9:55 am

The topic of “generational accounting” will likely surface when economist Lawrence Kotlikoff, who helped develop the approach over 20 years ago, testifies at tomorrow’s Senate Budget Committee hearing.  Generational accounting purports to compare the effects of federal budget policies on people born in different years.  But it’s far more likely to obscure than illuminate the budget picture, as we have explained.

Generational accounting calculates “lifetime net tax rates” for each one-year cohort of the population through at least age 90 and a separate lifetime net tax rate for all future generations combined.  Those measures are supposed to reflect each generation’s tax burden, minus the benefits it receives through programs such as Social Security and Medicare, under existing budget policies.

But generational accounting rests on several highly unrealistic assumptions.  Its calculations of lifetime net tax rates assume that there would be no changes whatsoever in current law for taxes or benefit policies for anyone now alive.  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).  And it 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, CBPP, 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.

Disability Allowance Rates Fall as Social Security Strengthens Oversight of Hearings

February 10, 2015 at 9:43 am

The rate at which Social Security administrative law judges (ALJs) approve claims for disability benefits dropped for the fifth straight year in 2014, new Social Security Administration (SSA) data show.  The ALJ allowance rate has fallen from 63 percent in 2008 and 2009 to 45 percent in 2014.  (See figure.)  Thus, claims that ALJs are “out of control” are without merit.

Claimants for Social Security Disability Insurance (DI) or Supplemental Security Income disability benefits apply to SSA, which rejects people who are technically disqualified (chiefly because they lack a sufficient work history) and submits the rest to each state’s disability determination service (DDS) for medical evaluation.  If denied, the applicant may ask the DDS to reconsider, and then — if rejected again — appeal to an ALJ.  (Many denied applicants give up at each stage and don’t appeal.)

The allowance rate has been considerably higher at the ALJ level than the DDS level, which has led to concerns about inconsistency in decisions.  Critics charge that SSA has prioritized speed over accuracy in decision-making, resulting in many ALJs awarding benefits to claimants who don’t meet the programs’ requirements.

The continuing drop in the allowance rate likely stems in large part from SSA’s increased monitoring and oversight of ALJs in response to these criticisms.  (The Great Recession also contributed.  Higher unemployment leads more workers to apply for DI, but approval rates fall.)

SSA now monitors ALJs more closely to identify those with extremely high or low allowance rates, assigns fewer cases to each ALJ, assesses the quality of ALJ decisions by reviewing a sample of allowances before they take effect, and has given ALJs new tools to help them review their own performance.

Since these management improvements took effect, the number of ALJs with unusually high allowance rates has fallen very sharply (from about 30 in 2007-2009 to seven in 2013), as has the number of quality issues in their decisions, according to SSA’s Inspector General.

Although allowance rates remain higher at the ALJ level than at the initial level, it is important to remember that ALJs often see claimants whose condition has deteriorated in the 18 months or so since their application was turned down and whose application is better documented (typically with the help of an attorney) than at the DDS stage.

Projected Health Spending Has Fallen Since 2010, Even With Health Reform’s Coverage Expansions

January 28, 2015 at 11:20 am

The Congressional Budget Office (CBO) now projects that federal health spending — including the costs of health reform’s coverage expansions — will be about $600 billion less over 2011-2020 than CBO projected in January 2010 without health reform (see figure).

In other words, projected health spending over the decade has fallen by $600 billion since 2010, despite $1 trillion in additional spending for premium tax credits and expanded Medicaid to help cover 27 million more Americans.

The decline in projected spending, which continues a pattern of downward revisions to CBO’s projections in recent years, stems from several factors.  One is health reform’s cuts in payments to Medicare providers and health plans.  Another is the recession, which has reduced the demand for health care services by slowing income growth.

But CBO and other experts have also concluded that a substantial part of the health care cost slowdown reflects structural changes in the health care system.  Professional associations, hospitals, and doctors are taking steps to curb costly and ineffective procedures and treatments.

CBO’s new report says, “Although views differ on how much of the slowdown is attributable to the recession and its aftermath and how much to other factors, the slower growth has been sufficiently broad and persistent to persuade [CBO and the Joint Committee on Taxation] to significantly lower their projections of federal health care spending.”

Health reform itself has most likely contributed to the slowdown as well.  As Kaiser Family Foundation President Drew Altman has written, “Even though its direct effects on system-wide costs may be limited so far, I believe Obamacare is having a significant indirect effect, although cause and effect and the magnitude are hard to prove. . . .  [It] is entirely likely that Obamacare has played and will continue to play a role in the slowdown in health-care cost growth and accelerating market change.”

To be sure, federal health spending — even if cost growth remains moderate — will keep rising as more baby boomers become eligible for Medicare and Medicaid.  Making the U.S. health care system more efficient thus remains a major budget challenge.  But CBO’s latest projections show that we’ve already made substantial progress.