LTC Bullet:  Bing, Bang, Boom:  Another Plan for LTC Reform
 

Wednesday, June 15, 2005 

Seattle-- 

LTC Comment:  Bing Chen's idea is for people to "trade off" Social Security income to help fund their long-term care.  We offer a summary of the proposal followed by our comments. 

LTC BULLET:  BING, BANG, BOOM:  ANOTHER PLAN FOR LTC REFORM 

LTC Comment:  Yung-Ping (Bing) Chen, Ph.D. holds the Frank J. Manning Eminent Scholar's Chair in Gerontology at the Gerontology Institute of the University of Massachusetts, Boston.  Bing's idea for melding Social Security and long-term care financing sounds like something Chairman Bill Thomas (R, CA), who has proposed expanding Social Security reform to include long-term care, might consider.  We think it is worthy of consideration and thoughtful criticism.  Hence the following coverage.  Dr. Chen expressly asked to have his email summarizing the proposal included to clarify how his recommendations would promote private LTCi policies. 

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Hi Steve:   

Your whirlwind activities in Washington are indeed impressive, and I think they will be productive of results in time.  I appreciate being included in your email distribution.  More power to your lips and pen! 

I want to keep you posted on what I am doing.  I recently made a presentation to the Ways and Means Committee.  If you have any suggestions, either on substance or language, you know I will appreciate them.  

In a presentation a few years ago, I had called my proposal an example of an "INTRAgenerational transfer model of social insurance" in contrast to the traditional "intergenerational transfer model of social insurance" that undergirds Social Security and Medicare.  Do you think it would be useful to discuss the proposal in those terms? 

On the title of this statement, perhaps I should have used a different one since my purpose is to promote the use of private insurance as well as social (public) insurance to pay for long-term care.  Maybe I should title it something like "Insurance for Long-Term Care:  Public PLUS private." 

I believe my proposal would be an effective way of promoting sale of private policies.  Since the basic coverage would be provided by public insurance, private long-term care insurance would cost less than it does now and thus become more affordable to more people.  The visibility of the SS/LTC plan could, in addition, serve as a catalyst to increase awareness of the need to prepare for long-term care.  How think ye?   

Travel safely and productively,  

Bing 

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Statement on “How to Create a Social Insurance Program for Basic Long-Term Care Coverage,” hearing on the Retirement Policy Challenges and Opportunities of our Aging Society, Ways and Means Committee, U.S. House of Representatives, May 19, 2005. 

Mr. Chairman and Members of the Committee: 

I appreciate the opportunity to present for your consideration a statement on “How to Create a Social Insurance Program for Basic Long-Term Care Coverage.” 

For the record, my name is Yung-Ping Chen.  I am a professor of gerontology and the Frank J. Manning Eminent Scholar’s Chair in Gerontology at the University of Massachusetts Boston.  My academic and professional background in the field of Social Security and economics of aging includes the following:  member of the technical panel of actuaries and economists of the 1979 Advisory Council on Social Security; delegate or consultant or both to the 1971, 1981, 1995 White House Conferences on Aging and the 1998 White House Conference on Social Security; and faculty appointments at several colleges and research organizations.   I am a founding member of the National Academy of Social Insurance and a fellow in the Gerontological Society of America. 

The statement I am presenting today, I should indicate, is based on my research that was supported by the Home Care Research Initiative of the Robert Wood Johnson Foundation.  However, the views I express are my own and do not necessarily represent the positions of any organization with which I am affiliated.

Mr. Chairman, you are right to highlight long-term care as a national policy issue, as you broaden the discussion of reforming Social Security to include other retirement policy challenges and opportunities for our aging society.  I applaud you for the vision you are introducing to the Congress and the nation.

Long-term care--health, social, and personal services performed at home, in the community, or in a nursing home or assisted-living facility--embodies many personal, family, and societal issues in an aging society.  The need for long-term care will grow with the “aging of the elderly.”  In 40 years, those 85 or older are estimated to more than triple, outpacing the growth rate of those 65 to 84, which will double.

A key policy question for long-term care is whether the current system of paying for it can be expected to meet future needs, a system that relies heavily on personal payment and public welfare (Medicaid) and only lightly on social insurance and private insurance.

Long-term care may carry with it substantial, even catastrophic, costs to an individual or a family.  But only a small proportion of people need an extensive amount of this care during their lifetimes.

Therefore, this contingency is best protected by insurance.  But insurance is in limited use, as just noted.  A system relying on Medicaid and personal payments to cover the bulk of the costs is problematic.  Medicaid has been subject to cuts and partial restoration of cuts over the years, and personal payments may impoverish people and they have.

As a possible remedy, some analysts propose expanding Medicare to include long-term care.  Others advocate a new social insurance program for it.  Given current and projected federal budget deficits, new tax dollars are even harder to come by.

Others have promoted private long-term care insurance as a solution.  Limited income tax deductibility already exists for insurance premiums, but few people buy private long-term care insurance policies.

Personal savings can certainly help, but not many individuals can amass sufficient financial resources over a lifetime to pay for the care of a long duration.  For others who may experience unemployment, illness, or disability during working years, chances for accumulating substantial wherewithal are especially slim.

Mr. Chairman and Members of the Committee, I believe a better way could be found by (1) more widespread use of insurance in both public and private sectors, and (2) linking several sources of funds that already exist in each sector to generate the needed dollars to pay for social insurance and private insurance.

The new method I propose is one in which social insurance and private insurance will pay for the bulk of the costs, supplemented by personal payments.  I call it a “three-legged-stool” funding model.

How then do we find public and private dollars for a new social insurance program and for the purchase of private insurance?  Since many people seem unable or unwilling to devote new resources for long-term care, I suggest using our existing resources more efficiently by trading resources dedicated for one purpose for another purpose.  I call it the “trade-off principle.”

Applying the trade-off principle in the public sector, we could divert, say, 5 percent of a retiree's Social Security cash benefits (not payroll taxes) to fund a social insurance program that provides basic long-term care.  I call this a “Social Security/Long-Term Care (SS/LTC) Plan.”  With this plan, retirees themselves are trading some income protection for some long-term care protection.  This would enhance a retiree’s total economic security.  Low-income beneficiaries, though covered by the program, will be exempt from the trade-off.  This program could pay for one year of nursing home care or two years of home care.

Participation in the SS/LTC plan could be mandatory with an opting-out provision.  So, people would be automatically enrolled in this plan upon receipt of Social Security retirement benefits, but they may opt-out of it within a reasonable timeframe.  Or people may be given a one-time opportunity to join SS/LTC plan at age 62 or 65.

To pay for longer periods of care, people would buy private long-term care insurance, much like those Medigap policies that supplement Medicare.  Since the social insurance program would provide the basic coverage indicated above, private long-term care insurance would cost less than it does now and thus become more affordable to more people.  The visibility of the SS/LTC plan could, in addition, serve as a catalyst to increase awareness of the need to prepare for long-term care.  And people would finance additional care out of pocket.

The trade-off principle is already being used in the private sector.  For example, a person could buy an insurance policy that combines life insurance and long-term care, which pays for long-term care expenses, if needed, by commensurately reducing life insurance benefits.  Although available, this type of combination policy is not wildly popular.  Perhaps there is a role for the government to encourage it.

To summarize, because the current system of relying primarily on personal payments and public welfare is inherently unsustainable or problematic and because the uncertain need for long-term care is a risk best protected by insurance, I have proposed a “three-legged-stool” funding model, under which social insurance would provide a basic protection that would be supplemented by private insurance and personal payment, with public welfare as a safety net.  These four sources of funds are the same as those used at present, but they would be deployed vastly differently under the proposed model.  Moreover, to implement the new funding model, I have also suggested a “trade-off principle” to generate money to pay for social insurance and private insurance because the prospect for new public and private dollars for long-term care appears dim. . . .

I would be pleased to provide additional materials to the Committee and its staff. Thank you for your attention.

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LTC Comment:  Following is our reply to Dr. Chen and our critique of his Social Security LTC Trade-Off proposal. 

Dear Bing:   

Always great to hear from you.  Thanks for the kind words and good will.  Your creative ideas are always welcome here.  I'm glad they're getting a hearing on the Hill too.  I wish there were more academics like you willing to open their minds and trying to build bridges. 

Thanks for sending me your testimony.  Here are some comments.  I think it is critical to explain how we got into the LTC mess we're in before proposing a solution.  Almost no one does that, however.  Truth is, few people pay privately or buy LTCi because the government has paid through Medicaid and Medicare for 40 years.  Adding more public financing of LTC won't encourage private financing, but will rather crowd it out even more.   

Your "intra-generational" model is interesting conceptually.  I read Laurence Kotlikoff's "The Coming Intergenerational Storm" over the weekend.  Pretty scary.  So, anything that discourages hanging the cost of the baby boomers on future generations is attractive.  The problem is that piggy-backing LTC on Social Security isn't much more help than adding it to Medicare.  Both programs are going down for the same reason.  Social insurance, like outright socialism, doesn't work.  It punishes effort and rewards sloth.  Private insurance spreads and prices risk, thus providing critical economic information about the cost of bad behavior.  Social insurance only spreads risk, but does not price it.  Social insurance sends the message that no one needs to be responsible if everyone is forced to pay.  We're beginning to see the economic consequences of that in Europe and Canada.  Recent repeal of the prohibition on private health care in Canada is a good example of how the world will be moving more and more toward private insurance and away from social insurance as demographic Armageddon gets closer and closer. 

I do think that, given the political reality in Congress and the Presidency, proposing a social insurance approach is tactically wrong.  I'd suggest that you focus on the private insurance aspects of your proposal, both in the title and in the substance as well.  The interest I'm seeing among legislators is in using private financing alternatives to relieve the burden on already overwhelmed public financing programs.  You could pitch your proposal that way, although we can't help coming back to the basic problem:  we don't need more dependency on public financing to encourage private financing.  Rather we need less public financing, better targeted to unleash the potential of private financing. 

Best regards, 

Steve