In Case You Missed It…

December 21, 2011 at 5:42 pm

This week on Off the Charts, we focused on the federal budget and health care and concluded our special series on safety net programs.

  • On the federal budget, Kelsey Merrick discussed how the cuts to Pell Grants for fiscal year 2012 that Congress recently agreed to would make it harder for many low-income students to afford college.
  • On health care, Paul Van de Water explained why the premium support proposal from House Budget Committee Chairman Paul Ryan and Senator Ron Wyden would likely shift substantial Medicare costs to beneficiaries.
  • On our special series on safety net programs, Stacy Dean elaborated on the importance of the Supplemental Nutrition Assistance Program (i.e., food stamps) in helping families afford an adequate diet.  Chad Stone showed that unemployment insurance plays a vital role in helping families stay afloat during periods of high unemployment.  Indivar Dutta-Gupta concluded the series by noting that while the safety net works, we should do more to reduce poverty.

In other news, we held a media briefing on the Ryan-Wyden premium support plan for Medicare and released a report on the case against premium support.

Taking Stock of the Safety Net, Part 6: It Works, But It Doesn’t Do Enough

December 21, 2011 at 5:35 pm

As we’ve shown in our blog series over the past week, millions more Americans would face poverty and severe hardship without programs like TANF, housing assistance, SNAP (food stamps), and unemployment insurance — as well as other programs that this series didn’t focus on, such as Social Security and the Earned Income Tax Credit.

Still, the tax code and government transfer programs do less than they could or should to reduce poverty.

U.S. Poverty Rate Is High After Taxes and Transfers Compared to Similarly Wealthy Countries

Other similarly wealthy countries have far lower rates of poverty after factoring in the impact of safety net programs even though, on average, they have similar rates of poverty before counting these programs (see chart).  That’s true largely because nearly all of these other countries do more: their programs are more generous, easier to access, and broader in scope than those in the U.S.

Let’s remember:  people need these programs because they either receive inadequate wages or cannot work.  For many working Americans, a job alone is inadequate to lift a family out of poverty.  Economic Policy Institute data show that in 2007 (the most recent year available), over 25 percent of all workers received wages that were inadequate to keep a family of four out of poverty.

These programs also help support many people who cannot work, including children, the elderly, and people with significant disabilities, as well as able-bodied adults who cannot secure adequate employment because jobs are scarce.

The safety net also helps push back against growing inequality, though not as effectively as it once did.

And research shows that keeping young children out of poverty helps them succeed in school and earn more as adults.

As policymakers consider proposals to address medium- and long-term deficits, they should keep these facts in mind and avoid cuts that would worsen the nation’s already high rates of poverty and inequality.  To further reduce poverty and inequality, we’ll eventually need to spend more in a fiscally responsible way.  We’ll also need to make our tax system more progressive — and do so in a way that raises more revenues to meet the nation’s pressing needs and promotes more broadly shared prosperity.

Why the Ryan-Wyden Medicare Plan Would Likely Shift Costs to Beneficiaries

December 21, 2011 at 3:24 pm

Our analysis of the Ryan-Wyden premium support proposal found that it would likely shift substantial costs to Medicare beneficiaries.  Some have asked about that conclusion, so here’s a more detailed explanation.

Traditional Medicare guarantees that beneficiaries have access to a specified package of health care benefits and services, and it pays doctors and hospitals when they provide those services.

Under premium support, in contrast, Medicare would pay insurance plans — one of which would be traditional Medicare — a fixed dollar amount per beneficiary (adjusted for the beneficiary’s health status).  Beneficiaries would pay the difference between the amount of that “premium support payment” and the cost of the plan that they selected.  (Click here for our detailed analysis of premium support.)

Put another way, while traditional Medicare is a defined-benefit system, the Ryan-Wyden premium support plan is a defined-contribution system.  As Chairman Ryan said of the Ryan-Wyden plan, “We are stopping the open-ended, defined-benefit system.”

The Ryan-Wyden proposal would limit the growth of Medicare spending per beneficiary to the growth of gross domestic product (GDP) per capita plus one percentage point.  Health care costs have grown faster than that for several decades, however, and the plan doesn’t clearly spell out what would happen to implement this limit if Medicare spending were projected to exceed it.

But one thing is clear:  limiting the growth in Medicare spending to GDP plus one percentage point is, in essence, limiting the growth in the premium support payment to GDP plus one percentage point.  After all, in a premium support system, the premium support payments constitute virtually all of Medicare’s spending.  Except for modest administrative costs, that’s all there is, so limiting the growth of Medicare spending necessarily means limiting the growth of premium support payments to plans.  Indeed, Chairman Ryan acknowledged at a December 15 briefing that the spending target would be met through automatic reductions in premium support payments, unless Congress decided to take other action.

Would the premium support payments under the Ryan-Wyden plan be sufficient to pay for the current package of guaranteed Medicare benefits without increasing premiums or cost-sharing for beneficiaries?  That’s the question at issue.

Two sentences in the proposal bear on this matter:

  • “To offset an increase in the cost of Medicare beyond the growth limit, Congress would be required to intervene and could implement policies that change provider reimbursements, program overhead, and means-tested premiums.”  This apparently refers to steps that Congress might take to hold down the growth of insurance plans’ costs and thereby assure that the premium support payment would be adequate to cover Medicare’s current benefit package.  But Ryan-Wyden couldn’t “require” Congress to intervene, and the proposal doesn’t spell out what would happen if it didn’t intervene.
  • “Any increase over [the GDP plus one percentage point] cap will be reflected in reduced support for the sectors most responsible for cost growth, including providers, drug companies, and means-tested premiums.”  This sentence could refer to some sort of automatic mechanism that would act as a fallback if Congress failed to keep plans’ costs within the spending limit.  But no other premium support plan has anything similar, and it’s difficult to see how such an automatic mechanism might be made to work, especially since — under a premium support system — Medicare no longer would be making payments directly to providers or drug companies.

Senator Wyden and Chairman Ryan could readily resolve the ambiguity in this area by providing legislative language for their proposal.  Unfortunately, they have said they do not intend to do so.  In the absence of further specifics — and without some automatic mechanism that reduces the cost of the benefit package to fit within the premium support payment — we can only conclude that the Ryan-Wyden plan, like other premium support proposals, is likely to shift substantial costs to Medicare beneficiaries.

Cutting Pell Grants Is Unnecessary and Unwise

December 21, 2011 at 11:18 am

The appropriations agreement for fiscal year 2012 that Congress finalized last weekend included some harmful changes to the federal Pell Grant program, which helps nearly 10 million low- and moderate-income students afford college.  While the deal omits the most severe Pell Grant cuts in an earlier House-approved bill, it will still make it harder for many low-income students to afford college.

The Institute for College Access & Success (TICAS) estimates that more than 100,000 students will lose their Pell Grant entirely next year because of a retroactive cut in the number of semesters for which a student can receive a Pell Grant; thousands more will lose part or all of their grant due to other provisions in the appropriations agreement.

Pell Grants have been under pressure in this year’s budget process, for two reasons.  First, the Budget Control Act placed restrictive caps on overall discretionary funding starting in 2012, forcing Congress to find savings among these programs.  Second, Pell Grants in 2012 require an additional $1.3 billion over the 2011 funding level in order to continue serving all of the students who qualify.

Responding to these pressures, lawmakers cut Pell Grant eligibility in ways that will reduce the level of annual appropriations needed for the program by an estimated $11 billion over the coming decade.  The Pell Grant changes contained in the new legislation, which will take effect July 1 (and thus affect students starting with the 2012-13 academic year), will:

  • Cut the number of full-time semesters for which a student can receive a Pell Grant from 18 to 12. This provision is retroactive, so any students who have received grants for 12 semesters will be ineligible for more, even if they’re just a semester away from graduation.  Pulling the plug on these students’ grants will impose additional hardships and likely prevent some of them from finishing college.
  • Make people who lack a high school diploma or equivalent ineligible for all federal student aid programs, including Pell Grants, even if they have completed the requisite testing or obtained the needed credits for their post-secondary program.
  • Cut the income ceiling below which students automatically qualify for the maximum Pell Grant from $32,000 to $23,000. The automatic qualification simplifies the complex financial aid application process — which can discourage low-income students from considering college altogether — by allowing very low-income students to bypass some of the more complicated and cumbersome parts of the application form.  With this change, students in the $23,000-$32,000 range will no longer be eligible for automatic qualification.
  • Make ineligible for Pell Grants any students who would otherwise qualify for only a very small grant, usually because their families’ incomes are near the program’s eligibility ceiling.  (This Congressional Research Service report provides detail on the “bump” award, which this provision eliminates.)

Cutting Pell Grants is unnecessary and unwise.  While Pell Grant spending has grown significantly in recent years, this reflects: eligibility expansions that Congress approved on a bipartisan basis to encourage more low-income students to get a college degree; increases in the maximum Pell Grant award that offset only a portion of the grant’s decline in purchasing power in the face of large increases in tuition charges (see graph); and the economic downturn, which has depressed family incomes and led many people to pursue college in order to improve their education and skills.

Pell Grants Have Lost Purchasing Power
*We revised this chart on March 13, 2012

Moreover, the Congressional Budget Office projects that Pell Grant costs would decline and then stabilize in real terms over the coming decade even if none of these cuts were made (and the maximum grant, now $5,550, increased with inflation through 2017, as current law prescribes).

Both to expand equality of opportunity and to improve the productivity of our workforce, the nation should make college more affordable, not less so.  Cutting Pell Grants is a wrongheaded step that is ill-advised both from the standpoint of promoting the well-educated workforce that we need for economic growth and from the standpoint of providing opportunity to all Americans.

Taking Stock of the Safety Net, Part 5: Helping Families Stay Afloat During Unemployment Spells

December 20, 2011 at 5:15 pm

Unemployment Insurance (UI) replaces up to half of the income that workers lose when they become unemployed through no fault of their own.  That lessens the financial strain on their families while these workers look for new jobs.  In a weak economy like the current one, UI also helps sustain consumer demand, keeping a downturn from being worse and providing a boost for a recovery.

As in previous recessions, policymakers responded to the deep recession that began in December 2007 by giving additional weeks of federally funded UI benefits to workers who run out of regular, state-funded UI benefits before they can find a job.

The number of people receiving UI benefits in a given week quadrupled from about 3 million at the start of the recession to a peak of 12 million in early 2010, according to Labor Department data.  Although that number has since dropped below 7 million, jobs remain hard to find and the long-term unemployment rate is unprecedentedly high (see chart).  Two-fifths of the unemployed have been looking for work for more than 26 weeks, the most weeks that state UI programs typically provide.

Long-Term Unemployment Rate Is Unprecendented

UI has done its job well thus far, such as by keeping 4.6 million people out of poverty in 2010 — 3.2 million of them as a result of the federal emergency UI benefits.  But the prolonged economic slump has placed considerable strain on the UI system:

  • Federal benefits in danger.  Congress has never let emergency federal UI expire when the unemployment rate has been as high as it is now, yet the fate of federal UI benefits in 2012 remains in legislative limbo.  If Congress doesn’t act before the end of this year, almost 2 million workers face a loss of benefits in January.
  • State benefit reductions.  Arkansas, Missouri, and South Carolina reduced the maximum number of weeks of UI benefits in 2011, and three more states — Florida, Illinois, and Michigan — will reduce benefits in January 2012.
  • “Reform” proposals that weaken the system. UI has always been a social insurance program that helps workers who have lost their job through no fault of their own.  Proposals like those in the recent House UI bill, which would require drug tests for UI recipients, deny benefits to all workers who lack a high school diploma or GED certificate and are not enrolled in classes to get one, and allow states to use UI funds for purposes other than paying benefits, would alter the very nature of the program and make it harder to qualify for benefits.  They also would make the system more costly to administer.
  • Unaddressed solvency issues. A number of states’ UI trust funds were inadequately prepared for the recession because states had kept the employer tax that pays for UI benefits artificially low.   Most states have borrowed from the federal government in the past few years to help pay benefits, and that debt is creating significant pressure in state legislatures to cut UI benefits.

    Moreover, without reform, most state UI trust funds likely will face the next recession either still in debt from the current downturn or so weak that they will quickly be back in debt.  A bill introduced in the Senate earlier this year, building on a proposal by President Obama, would give states a framework to restore the health of their trust funds.  Unfortunately, Congress hasn’t acted on it — or any other proposal to improve UI financing for the future.