An Expected Surprise: The Doubling of the PBGC’s Deficit

Filed Under (Retirement Policy, U.S. Fiscal Policy) by Jeffrey Brown on Nov 17, 2009

Last Friday, the Pension Benefit Guaranty Corporation (PBGC) announced that its deficit had doubled over the past year.  The PBGC is the government agency that insures defined benefit (DB) pension plans in the U.S.  While this doubling of the deficit was widely reported in the press, the only thing surprising about this announcement was that anyone was surprised by it.

 

Since the PBGC was created through the passage of ERISA in 1974, the basic design of the program has been fundamentally flawed.  As I have discussed in several papers, the PBGC fails to price this insurance properly, fails to provide adequate incentives for funding, and fails to provide adequate information to market participants.  As a result, DB plan sponsors have the incentive – and the legal right – to fund their pensions in a manner that imposes large future obligations on U.S. taxpayers.  (And as for the PBGC experts out there who will quickly point out that the PBGC is not funded by taxpayer dollars, I ask you only one question – given our experience of the past 15 months in which the U.S. government has not only bailed out government sponsored enterprises such as Fannie and Freddie, but also private sector companies such as G.M., do you really think Congress will let millions of pensioners lose their benefits when the PBGC runs out of money?)

 

Given that the program’s finances have been underwater for years, and given that numerous academics, think-tanks, and government policy experts such as the GAO and the CBO have all pointed out that the PBGC is on an unsustainable course, the latest numbers simply confirm what we already intuitively know – the PBGC’s finances are deteriorating rapidly.

 

Here are the facts as of September 30, 2009:

-         The PBGC had only $68.7 billion in assets to cover an estimated $89.8 billion in liabilities.

-         The PBGC “acquired” responsibility for an additional 144 plans during the year.

-         27 large plans – with liabilities of over $1.6 billion are now listed as “probably losses” on the PBGC’s balance sheet

-         The PBGC notes that “potential exposure to future pension losses from financially weak companies” is approximately $168 billion.

 

I do, of course, realize that it is difficult to get people exercised about this issue.  Even $168 billion, let alone $22 billion, no longer seems like a big number coming in a year after trillions have been spent on stimulus plans and TARP-like programs.  Nor does it seem large relative to the tens of trillions in unfunded liabilities facing Social Security or Medicare.  But $168 billion is still real money – even in Washington. 

 

What needs to change?  One useful first step would be to give the PBGC the authority to charge market-based premiums for the insurance it provides.  It is true that this might hasten the decline of DB plans in some sectors.  But I would submit that if making firms pay the true cost of their pensions means that they no longer find it attractive to offer them, then perhaps the efficient outcome is for them to end the plans before they dig the fiscal hole any deeper.

Is the U.S. sicker than other countries? Part 2

Filed Under (Health Care) by Nolan Miller on Nov 5, 2009

A couple of weeks ago I wrote about how Americans may spend more on health care because we are sicker than those in other countries.  A recent paper provides additional evidence on this point.  (Thanks to the Economic Logic blog, which pointed out the paper.)   The paper, by RAND Corporation researchers Pierre-Carl Michaud, Dana Goldman, Darius Lakdawalla, Adam Gailey and Yuhui Zheng, is entitled “International Differences in Longevity and Health and their Economic Consequences”, and it begins by noting that in 1975, life expectancy at age 50 was about the same in the U.S. and Europe.  Since then, however, Europeans have gained more than Americans.  In 2004, a typical 50 year old Eurpoean expected to live another 32.5 years, while his American counterpart expected to live only 31 more years.  Next, they note that Americans appear worse on several health indicators than Europeans.  For example, the U.S. looks worse than the group of Eurpean countries they study (Demnark, France, Germany, Greece, Italy, The Netherlands, Spain, Sweden) in terms of obesity, whether the person has ever smoked, heart disease, diabetes, stroke, lung disease, cancer, hypertension and disability.  This leads to the main question of the paper: how much of the difference in life expectancy from age 50 is driven by these differences in health?  If observed differences in health do not account for the difference in longevity, then it is possible that “‘being American’ an independent mortality risk factor, in the same way that being poor or being black increase risk above and beyond observed health.”  This ‘being American’ effect could be due to shortcomings of our health care system relative to that of other countries.

The main finding of the paper is that, if Americans had the same baseline health status as the Europeans in the study, they would live about 1.2 years longer.  So, differences in health status account for about 80% of the 1.5 year difference.

Of course, differences in health status at age 50 could, themselves, be a product of the health care system.  So, it is not immediately clear from the Michaud et al. paper that Americans are genetically sicker or that we make behavioral choices (e.g., eat too much) that make us sicker.  It could be that we get worse health care throughout our lives, and this leaves us sicker at age 50.  I suspect that this is not the case, but it is certainly a possibility.

This reminded me of a paper I saw a few years ago by Daniel Polsky and others entitled “The Health Effects of Medicare for the Near-Elderly Uninsured.”  The study found that if a person was basically in good health when they went on Medicare at age 65, Medicare helped to keep them that way.  But, for those who were already in declining health, Medicare was not that effective.  Now, if as the previous study showed, Americans have higher prevalence of chronic disease at age 50 than other countries, it may be that we, for whatever reason, enter the period of “declining health” earlier than Europeans do.  If insurance (as proxied by Medicare) is more effective in maintaining good health than restoring one to good health once deterioration has begun, then this suggests that the place to focus our efforts if we want to close the longevity gap with Europe would be in increased prevention and disease management efforts in middle age.

Next week: does preventative care save money?

Is the U.S. sicker than other countries?

Filed Under (Health Care) by Nolan Miller on Oct 22, 2009

Last week I wrote about how the US does not seem to compare well to other OECD countries on several outcome measures.  The US doesn’t do well in an absolute sense, and they seem to do especially poorly when you take into account how much the US spends on health care.

I must admit, that I have mixed feelings about those statistics.  On the one hand, the US does spend a lot and our outcomes appear to be no better.  However, as I mentioned, there could be a number of explanations for this, and not all of them imply that there is something wrong with the US health care system.  First and foremost among these is the topic of today’s post.  Maybe the US is just sicker than other countries, and because of this we need to spend more on health care.  Seen in this light, the US health care system may be very productive, since we start at a lower baseline.  What would have happened in the absence of spending on medical care is much worse in the US than other countries, so even though we end up at about the same level in terms of quality, the US health system has produced greater health improvements than other countries’ systems.

The first piece of evidence on this point is a 2006 paper in the Journal of the American Medical Association by James Banks, Michael Marmot, Zoe Oldfield and James Smith, entitled “Disease and Disadvantage in the United States and in England.”  The paper compares various measures of health in residents of the two countries aged 55 – 64.  They find that the US population is significantly sicker than that of England.  The following table reports the percent of the sampled population in each country that reports each of the conditions in the left hand column.

 

England

United States

Diabetes

6.1

12.5

Hypertension

33.8

42.4

Heart Disease

9.6

15.1

Stroke

2.3

5.4

Lung Disease

6.3

8.1

Cancer

5.5

9.5

In each case, the United States has a (statistically) significantly higher percentage of each of the conditions.  While some of the differences can be accounted for by differences in behavioral risk factors, in particular by the higher rate of obesity in the US, much of the difference seems to be driven by non-behavioral factors (e.g., genetics, environment, etc.).

The second article I want to mention is one by Samuel Preston that summarizes the findings of some of his joint work.  The paper investigates two possible causes for why the US lags behind other countries in terms of longevity.  First, that the deficit is due to problems with the US health care system.  In a study with Jessica Ho, Preston finds little evidence that the US system has difficulties producing health improvements that contribute to the longevity gap.  (Note – this is not to say that the US system doesn’t have quality problems that should be addressed.  See my previous posts about that.)  Second, and more interestingly, in a study with Dana Glei and John Wilmoth, Preston argues that in the past, the US had a high smoking rate relative to other OECD countries, and that the negative health effects of smoking are still being felt in terms of reduced longevity.  Once the impact of smoking is accounted for, the US compares much better to the rest of the OECD.  For example, eliminating smoking-related deaths would increase US life expectancy at age 50 by 2.6 years for females and 2.8 years for males.  If all smoking-related deaths are removed from the data in all OECD countries, life expectancy at age 50 would move up from ranking 17th out of 20 to 7th for men, and from 14th to 9th for women.

So, there appears to be some evidence that people in the US are sicker than in other countries.  In light of this, given that we are wealthy even by the standards of the OECD, we should be spending more on health care than other countries.  However, the questions of how much more and whether the dollars we do spend could be used more wisely, remain open.

Is U.S. Health Care Efficient?

Filed Under (Health Care) by Nolan Miller on Oct 15, 2009

In the past weeks, I’ve argued that the US spends more than other countries on health care.  This fact is not in dispute.  However, one could argue that, if the increased expenditure on health care is buying more health, then the US system might still be efficient.  We’re a rich country, and we choose to spend more on health care and get more health because of it.  If true, there would be nothing wrong with spending a lot on health.

There are a lot of academic studies on this point, and maybe I’ll discuss some of them in future weeks.  (My favorite is a paper by Alan Garber and Jonathan Skinner that appeared in the Journal of Economic Perspectives last year entitled “Is American Health Care Uniquely Inefficient?”  The short answer is, yes.)  Today, I took some time to play around with the OECD health data.  The OECD is a group of 30 wealthy, developed countries.  If we are going to compare ourselves to other countries, then the OECD is probably the right group of countries to look at. 

My findings are in four charts.  I apologize that the country labels blend together, but the US is conveniently so far from everyone else that it is always easy to identify it!

The first compares per capita GDP to per capita health care expenditures.  Here, we see what we expect to see.  The US spends more per capita on health care than the other OECD countries.  One might expect that wealthier countries spend more on health care, and the trend line shows that this is the case.  But, the US is way above the trend line, indicating that our expenditure is more than can be accounted for simply by our high per capita GDP.

oecd11

The second chart plots life expectancy from birth (2005) against per-capita health expenditure.  Although the trend line shows that, in general, higher health expenditure is associated with higher life expectancy, the US is well below the trend line.  Even if you don’t believe in the trend line, it is clear that life expectancy in the US is no larger than it is for other wealthy countries, and the US clearly spends more on health care.

 

 The third chart looks at infant mortality per 1000 live births vs. per capita health expenditure.  Here, the US is well above the trend line, suggesting that our extra health expenditure is not associated with lower infant mortality.

oecd31

The final chart compares something called “Potential Years of Life Lost” (PYLL) to per capita health expenditure.  The OECD explains PYLL as:

PYLL is preferred as a summary measure of premature mortality since it treats the life year saved – rather than life – as the unit of output.2 In effect, in the calculation of PYLL deaths are weighted according to their prematurity preceding an age limit – 70 in this study. With this age limit, the death of an infant (70 life-years lost) will be given fourteen times the weight given to the death of a person aged 65 (5 years lost). Conventional mortality rates, on the other hand, implicitly give the same weight to all the deaths irrespective of age. Usually, for cross-country comparisons, the number of PYLL is expressed as rate for 100 000 population.

Thus, PYLL is a measure of mortality that gives greater weight to young people who die than older people.  In general, increased expenditure is associated with a decrease in PYLL.  Once again, the US is well above the trend line.  Here’s the chart.

oecd4

***NOTE: although graphically there appear to be trends in all cases, in the case of infant mortality and PYLL, the statistical relationship for the crude regressions is boarderline significant at best***

So, what do we make of this?  What is clear from the data is that the US spends more on health care than other countries but our results do not, at first glance, appear in line with this increased expenditure.  Before we make too much of it, however, we should all recognize that these charts do not tell a causal story.  If, for example, Americans are sicker than other people, it may be that we have to spend as much as we do in order to achieve the rather poor results illustrated in these charts. If we were to reduce our expenditure to a level more in line with other countries, we might do even worse. If that were the case, I’d be fine with the data.  Maybe we should even be spending more.

In my opinion, the US is so far off the trend line on so many different dimensions of health quality that I tend to believe there is something about our health production function — the way we finance and deliver care in this country — that leads us to spend money without appreciable results.  There seem to be many pieces to the puzzle – overuse of technology, paying for procedures instead of paying for health, defensive medicine, and more.  There probably isn’t a single source, but rather a lot of smoldering fires that combine to create a lot of smoke. And, given that every player in the health reform debate has their own turf to protect, this makes starting to attack the problem all the more difficult.