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Rethinking Small Employer Health Insurance
For many years, health reform advocates focused on improving the market for small group health insurance. Small employers were, and are, much less likely than their larger counterparts to offer health insurance coverage to their employees. Encouraging small employers to offer coverage was therefore seen as a key to moving toward universal coverage within our existing private-payer system. Various reforms were introduced, including restrictions on premium fluctuation and medical underwriting within small group markets. These efforts made abundant sense, given that individual health insurance markets in most states were much less desirable avenues to coverage than group policies, particularly for any individual with negative health history or risk. In addition, employer coverage offered tax benefits unavailable for individual health insurance, allowed employers to serve as information intermediaries, and resulted in decreased administrative expenses.
This paper will examine whether, in light of the passage of the ACA, small employers should continue to be a focus of health care reform efforts. In particular, it will examine the extent to which the ACA continues to encourage small employers to offer coverage and what advantages, if any, are likely to be afforded by such coverage, within the broader context of the ACA’s reforms. It will conclude with suggestions for how the ACA can be improved to better support a constructive role for small employers in health care reform.
The Quandary of Federal Intervention in Retiree Health Benefits
The United States Postal Service teetered on the brink of disaster heading into the fall of 2011. The reasons were manifold, but the tipping point seemed to rest – improbably – on a retiree benefit. Back in 2006, Congress forced the Post Office to fund its accumulated future retiree health liability over a ten-year period. That translated to about a $5.6 billion bill due each September, which the struggling national mail service could ill afford to pay. Although the Post Office problem poses unique challenges, similar issues plague most employment-based retiree health plans. With millions of current and future retirees and their families depending on such benefits, the federal government sporadically acts to stabilize and preserve retiree health insurance. The federal rescue efforts sometimes slow the rate of decline, but their long-term effectiveness has been limited by the absence of a coherent, forward-looking plan that takes into account the needs and challenges of the various stakeholders in these benefits. This presentation will consider the quagmire of federal intervention in employment-based retiree health benefits, most recently in the Patient Protection and Affordable Care Act. In an effort to develop a useful framework for evaluating future government actions, the presentation will attempt to untangle the confused and conflicting policies and goals that have muddied understanding in this area.
Colleen E. Medill
The New Revocable Property
In his 1964 article entitled The New Property, Professor Charles Reich identified government “largess” as an emerging source of wealth in American society. Reich astutely recognized that as the wealth of more and more Americans depended on their relationship to government, such a profound and fundamental change in how individuals acquired wealth inevitably would transform society. Reich called for new legal safeguards to protect the rights of individuals who held this "new property."
Over forty years later, another fundamental change is occurring that will once again have a profound impact on the relationship between the individual and her government. Although government continues to create wealth for some individuals in society, increasingly government revokes – either directly or indirectly – private property rights held by other individuals, particularly when such rights are dependent on government largess or subject to government regulatory supervision. Using examples from intellectual property, land use planning, corporate finance and the energy industry, this work-in-progress places the trend toward retrenchment in public and private health care and retirement benefits within the broader context of a more organic shift in the relationship between the individual, private property rights, and government.
Tax Costs and Distributions of Tax Benefits in Qualified Retirements Plans and Some Thoughts on Mitt Romney’s Midas IRA and Other Related Issues
Social Security in an Era of Retrenchment: What Would Happen if the Social Security Trust Funds Were Exhausted?
Currently, Social Security’s income, including interest income on the Social Security trust funds’ reserves, exceeds current costs. The system, however, is facing a long-term deficit. Specifically, the Social Security Trustees project that if Social Security is not amended, its reserves will be depleted by 2036. At that point in time, Social Security’s income will only be sufficient to cover about 77 percent of promised benefits. This paper addresses the question: What would happen if the Social Security trust funds were exhausted.
Social Security is often referred to as an entitlement program such that beneficiaries are “entitled” to promised benefits. Yet, the Social Security Act specifies that benefit payments shall only be made from the trust funds (that is, accumulated trust fund assets and current tax income), and the Antideficiency Act prohibits the federal government from spending in excess of available funds. What would happen in the event that promised benefits were to exceed funds available to pay for those benefits?
Could Congress avoid this dilemma by amending the program to reduce the benefits of current beneficiaries? Section 1104 of the Social Security Act expressly authorizes Congress to amend any provision of the Act. Relying on this provision, the Supreme Court held in Flemming v. Nestor that beneficiaries do not have “accrued property rights” in their Social Security benefits, and Congress may reduce the benefits of current beneficiaries. In a highly influential article, The New Property, Charles Reich severely criticized Flemming v. Nestor and argued that government largess should be a protected property interest. In Goldberg v. Kelly, the Supreme Court explicitly cited Professor Reich’s work and declared, “It may be realistic today to regard welfare benefits as more like ‘property’ than a ‘gratuity.’” In Matthews v. Eldridge, the Supreme Court held that the continued receipt of Social Security disability benefits is a “statutorily created ‘property’ interest protected by the Fifth Amendment.” Citing these cases, commentators have argued that Flemming v. Nestor is “outdated case law” that has been “called into question.” Does Flemming v. Nestor remain good law? Can Congress amend Social Security to reduce the benefits of current beneficiaries without running afoul of the Takings Clause?
The Role of Non-Public Actors in the American Social Security System
Brendan Maher and Radha Pathak
Health Insurance and Federalism-in-Fact
The Affordable Care Act has occasioned a constitutional federalism dispute at the Supreme Court level, and there has been extensive scholarly analysis of whether the Act constitutes an impermissible exercise of federal power. This Article also examines the extent to which the ACA infringes on state power, but it does so from the perspective of federalism-in-fact, rather than as a matter of constitutional federalism. Such an analysis reveals that, while the ACA certainly limits the ability of states to regulate private health insurance, it does so less than detractors suggest. This is true for two key reasons: first, private health insurance has already been federalized to a greater extent than many commentators appreciate, and second, the ACA creates the possibility that opportunistic states can actually expand their regulatory influence. When the practical federalism effects of ACA are taken into account, the picture that emerges is not necessarily one in which the states are helpless bystanders to a federal takeover of private health insurance. To the contrary, states will retain a significant ability to flex their regulatory muscle, if they can find the legislative will to do so.
ERISA Benefits Litigation Before and After Glenn: An Empirical Picture
This project is an empirical examination of ERISA benefits litigation in the federal courts, both before and after the Supreme Court's 2008 decision in Metropolitan Life Insurance Co. v. Glenn. Using data from the PACER database, I have developed two random samples of cases, the first arising between the beginning of 2006 and the date of the Glenn decision, and the second arising between Glenn and the end of 2010. For each sample, I have assessed a number of variables, including the type of benefit plan at issue, the arguments advanced by the litigants, and the outcome of the case.
Using the data collected, I hope to accomplish at least four goals: (1) develop an empirical picture of benefits litigation across the entire 2006-2010 period, including any significant relationships among the variables measured; (2) determine whether the cases filed before and after Glenn differed significantly with respect to any of the variables; (3) reassess published views about the effects of Glenn on benefits litigation; and (4) relate my findings to the existing literature on the dissemination of legal rules and changes. My presentation at the conference will focus on the first three of those goals.
Peter Wiedenbeck (co-authors Rachael K. Hinkle & Andrew D. Martin)
Invisible Pension Investments
Funds accumulated in private pension plans now exceed $5.5 trillion in the aggregate. This vast store represents a large share of the retirement savings of American workers, both active and retired. How are those pension funds invested? Despite annual financial reporting requirements imposed by the Employee Retirement Income Security Act of 1974 (ERISA), we don’t know. Nor is the U.S. Department of Labor, which administers the ERISA’s reporting and disclosure regime, currently able to say. The problem lies in a failure to connect the dots.
Large private pension plans, meaning plans covering 100 or more participants at the start of the plan year, annually report summary balance sheet (asset and liability) and income statement (earnings and expenses) information on Form 5500, Schedule H. These plans commonly invest a large share of their assets in various collective investment vehicles, including common trust funds managed by banks, trust companies, or similar institutions, pooled separate accounts sponsored by insurance companies, and master trusts, which facilitate joint investment of the assets of more than one plan sponsored either by a single employer or by a group of commonly controlled employers. Some of these collective investment vehicles are permitted or required to file their own annual reports with accompanying financial information (Form 5500 and Schedule H), and are referred to a “direct filing entities” (DFEs). A pension plan that invests through a DFE need only report its interest in the entity; the investor-plan is excused from providing detailed information about the underlying assets, liabilities, and transactions of the DFE. Thus, the annual return of a pension plan that invests some of its funds in a DFE will show its direct investments in stocks, bonds, real estate, and other asset categories, and will report its interest in any DFEs, but will not disclose the underlying holdings of the DFE. The DFE’s return will of course report a categorical breakdown of its assets and liabilities, but linking the DFE’s investments with its investor plans presents the challenge. Without such a link we lack a composite picture of a pension plan’s direct and indirect holdings of various categories of assets and liabilities, effectively rendering part of the plan’s financial position invisible, in the sense that plan participants, federal regulators, policy analysts, and the public at large cannot “see” the characteristics of indirect investments held in DFEs, nor evaluate the composition of the plan’s overall portfolio.
Just how serious is the resulting gap in our knowledge? How concerned should we be about the inability to look inside the black box of DFEs? When it comes to readily available public information on the allocation of private pension plan investments, we are astonishingly ignorant. In 2009 large single-employer defined benefit plans had invested 62.6% of their total assets, on average, in three types of DFEs: master trusts (48.4%), bank common trust funds (12.7%), and insurance company pooled separate accounts (1.5%). Thus, a majority of the assets of large single-employer defined benefit plans are reported only as undifferentiated indirect investments made through DFEs. This paper describes a project to associate DFE asset holdings with the pension plans investing in the DFE, and reports our preliminary results for large plans.
Lessons from the Ontario Expert Commission on Pensions for U.S. Policymakers
Relying on first time interviews of key pension decisionmakers from the Ontario Expert Commission on Pensions (OECP), and management and union lawyers directly involved in this pension reform process, this paper explores what lessons can be learned to improve the United States occupational pension system under ERISA.
As has been well documented, a dramatic shift from defined benefit plans to defined contribution plans has taken place in the private sector in the United States over the last decade. Many large companies are no longer promising an income stream for an employee’s entire retirement, but are pushing 401(k) salary-deferral plans as less administratively-burdensome alternatives. The problems with these consumer-driven pension plans are legion, but most serious are the problems revolving around individuals not saving nearly enough money to survive retirement.
After considering similar problems in Ontario, the OECP, led by its Chairman Harry Arthurs, came up with a large number of innovative proposals for the Ontario provincial government to consider. This paper specifically analyzes two types of OECP proposals: (1) proposals stressing the need for pension plan innovation, and (2) proposals stressing the need to improve the process of pension policymaking. Having examined these pension proposals in detail, and based on interviews of those who made these recommendations, this article concludes by considering whether these recommendations could be modified and applied to address similar challenges that face the US’s occupational pension scheme under ERISA.
Defaults--A Comparative Approach to Fiduciary Obligation and the Role of Markets
Both the United States and Australia have increased the use of default settings in defined contribution (DC) plans. However, policy makers in the two countries have taken different approaches to important aspects of default investment products. This article discusses the regulation of those default investment products particularly regarding the assignment of fiduciary responsibility. It concludes that Australia’s approach offers two lessons for the U.S. First, disclosure to and education of participants who are defaulted into investment products appears to be of limited value to those participants. Second, to the extent possible, the locus of fiduciary responsibility for default investment products should be with those who are expert on and manage those products. A draft of this article is available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1983945.
Optimal Distribution Rules for Defined Contribution Plans: What Can We Learn from Other Countries?
The United States, Australia, and many other industrialized nations have multi-pillar retirement systems that include a public component and a private component. Increasingly, the private component consists of an employer-provided defined contribution plan or other privately-managed individual retirement savings account. In order to get adequate retirement income from their individual account plans, employees need to ensure that significant contributions are made to those plans (contribution phase), that those contributions are invested well and retained until retirement (accumulation phase), and that the accumulated retirement savings are used to provide benefits throughout retirement (pay-out phase). This paper focuses on the rules governing that pay-out phase. More specifically, this paper discusses the current rules governing benefit distributions from individual account plans, explains the various financial products that can be used to provide lifetime retirement income, and considers various distribution rules that could be used to encourage retirees to select the appropriate lifetime retirement income products.
Pertinent here, longevity risk—the risk of outliving one’s retirement savings—is probably the greatest risk facing current and future retirees with individual account plans. As life expectancy increases, accumulated retirement savings in individual accounts will need to finance an ever-greater portion of retirees’ ever-longer retirements. In that regard, traditional lifetime annuities offer one approach for spreading retirement savings out over a lifetime. Another popular approach is for retirees to commit to systematic withdrawals of, say, four percent of their account balances each year—a strategy that has a relatively low risk of ruin (running out of money before death). Another alternative involves buying longevity insurance, for example, buying a deferred annuity at age 65 that starts making annual payments only if the annuitant lives past age 85. Finally, retirees can invest in variable annuities with guaranteed lifetime withdrawal benefits funds that provide guaranteed systematic withdrawals for life, with guaranteed minimums that kick in if the underlying investment funds are ever depleted due to long life and/or poor investment returns.
Today, relatively few countries have rules that encourage retirees to take their individual account plan distributions in the form of annuities or other lifetime income products. Ultimately, this paper seeks to identify the optimal set of distribution rules to encourage individuals to select annuities and/or other appropriate lifetime retirement income products.
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