by Mark Litow and Bob Shapiro (2015)
The SIPF Section’s first newsletter in January 2010 quoted Albert Einstein saying, “Imagination is more important than knowledge, for knowledge is limited to all we know and understand, while imagination embraces the entire world and all there will be to know and understand.” The author’s then somewhat caustically observed, “Einstein never could have envisioned the extent of the imagination of designers and “managers” in our public financial systems.”
Quoting the great, but less erudite, Yogi Berra, “ It’s déjà vu all over again,” as Obamacare continues to evolve and we continue to be reminded of the need for our actuarial profession to bring the same focus, discipline and accountability to these public systems that we demand in other actuarial programs.
At the heart of many of our current problems is the fact Washington ignores the need for, and denies the relevancy of, a disciplined financial (actuarial) management system (i.e. a continuous, controlled process in which the program manager (actuary?) identifies the specific problem or challenge, develops a fiscally responsible solution, monitors the experience from year to year and adjusts the program accordingly). The process repeats continuously providing a management feedback loop critical in managing financial (actuarial) risks.
Case in Point: The “Cadillac Tax.” The Cadillac Tax is in the news again because politicians who supported it as a part of the funding for Obamacare have just recently delayed it, underscoring, once again, how the projected and actual costs for our national social insurance programs are managed and mismanaged in Washington, D.C..
The tax was, and is, necessary to financing Obamacare, providing according to at least one estimate, $90+ billion over the next decade. Delaying it will therefore reduce the projected funding for Obamacare, and if the delay becomes permanent the shortfall will be an increasing annual amount between 2018 and 2026, or at least up until the date of implementation. These missing billions of revenue will have to be replaced by other tax dollars or be supported by cuts in other programs never envisioned when Obamacare was passed.
We have arrived at this sorry situation because our elected officials ignored – and continue to ignore – fundamental principles of responsible fiscal oversight and the need for an actuarial control cycle. Specifically, for example, financing for Obamacare is based on ad hoc pay-as-you budgeting which means that this financial security system lacks any provision for ensuring its long term sustainability; and, the monitoring systems in place for Obamacare do not follow any actuarial method that complies with basic practices acknowledged as fiscally responsible by the profession.
In addition, the use of a 10 year window instead of a present value approach allows confusing, misleading and fiscally irresponsible manipulation of projected costs and revenues. The development of revenue and costs estimates in Congress, (i.e., the “scoring” of bills, including benefit provisions) has become a political art form that frequently produces budgets that rely heavily on pushing receipt of revenues up front and incurring of expenditures down the road. When Obamacare was introduced, for example, the ten year score for revenue at that time was about $90 billion, but that was only for the four years of 2018-2021 as the first six years were zero.
In short, while it may be difficult to see details in the constantly foggy and opaque political world, certain patterns emerge. First, our policy makers design the desired program (e.g., Obamacare) and project how much the benefits of the program will cost in the future, but really only assess a short time frame (ten years if not much less). Then, they look at how to “fund” the benefits of the next ten years in a manner that enables them to state that the program is ten year “cost neutral or better.” In the case of Obamacare the process looks something like this:
- Pass the legislation (in 2010). Start the funding process immediately but delay the inception of actually paying benefits under the program until 2014.
- Delay politically sensitive funding pieces for a period of years to minimize criticism of the proposed bill. For example, the Cadillac Tax isn’t scheduled to begin until 2018.
- Pass the bill.
- Manage the work on the 2014 launch to minimize focus on anything other than the promoted “benefits” of the legislation. Remember, ten year cost neutrality was “established” earlier.
- In response to voting constituency push back, immediately begin the ritual of reversing aspects of the program…like the “doc” fix and the Cadillac Tax.
The amazing part about this very visible game is how little pressure the media and our own actuarial profession has put on our Washington politicians to do their work with the discipline demanded in other actuarial programs. We as a nation need to demand better. We as actuaries have a civic and professional obligation to bring the needed focus, discipline and accountability to these public systems before it is too late.