AARP estimates that around 25 Million persons are providing unpaid caregiving to a loved one with a disability, and that those who do so while juggling market work lose around $325,000 in lifetime income after accounting for foregone wages, income from Social Security, and private pensions. The worst part of the demise of the CLASS provisions in the Affordable Care Act has been the fact that the majority of the focus was on the impact of CLASS on the 10 year deficit score assigned to the bill be the CBO (it accounted for around half of the ACA’s deficit reduction), diverting attention from one of the most profound public policy questions facing our nation:
CLASS wasn’t an accounting gimmick, but an attempt to set up a self sustaining, voluntary LTC insurance program that would provide modest benefits (not enough for a nursing home; best thought of as aiding aging in place) to persons with disabilities. If CLASS had worked perfectly and been a self sustaining program, it would have decreased the deficit in the short term, while increasing the deficit in the out years. As I wrote in December, 2009 about CLASS:
…Proponents claim that CLASS is self-financing over the long term, and opponents say it will increase the deficit in later years. Both are correct.
It is hard to project what will happen with CLASS, mostly because of uncertainties regarding disability rates 30-plus years from now, but there are numerous provisions designed to ensure that the program is self-financing. Regarding the long-term deficit, when a program runs a surplus, it buys federal securities that pay interest. When interest is later used to pay for care, it is counted as a transfer instead of revenue. Therefore, CLASS will inevitably increase the deficit in years 30 to 75 even if it pays for itself totally through premiums and interest earned on premiums, given current budget accounting rules. [update: it would add to the deficit before the 30th year]
One of the key beneficiaries of a self sustaining LTC insurance program would be the adult children of the disabled-who provide unpaid caregiving, with all the related harms (there are also benefits). CLASS was flawed, but could have been fixed had we focused on the policy goal-how will we insure LTC as the baby boomers move into retirement? I think the federal budget deficit is very important to address, but you cannot answer all important policy questions using deficit accounting. The CLASS episode whereby LTC policy was lost in a sea of deficit accounting scores shows this.
Nice post.
CLASS is just another example of the fact that you can’t answer pretty much any important policy question using current government accounting methods. But that’s something that’s already known — the question of impacts on the deficit pretty much only ever gets pulled out in general conversation when it’s a potential justification for reducing social services.
(And yes, in the long term we need government accounting models that do better than a simple year-to-year cash basis, but doing that in a non-disastrous manner will require the political demise of at least one party’s leadership.)
Through an accident of history, my gang of statisticians is housed in a college of business. My economist and accounting colleagues have assured me many times that no business that has ever existed could possibly show a profit using the accounting methods our government uses. Even households don’t operate with accounting models the federal government uses.
We desperately need better accounting models for government. But we won’t get them any time soon (absent a Whiggish transformation of the Party of Lincoln.)
So what you’re saying is that the government uses the kinds of accounting more typical of a professional sports team?
Accounting for government in general, and the federal government in particular, is fraught with a lot of problems. Start with the fact that the single biggest asset government has, the power to tax, essentially can’t be valued. Throw on top of that the fact that the federal government literally cannot go bankrupt so long as its debt is valued in a currency whose creation it controls. Now you have completely destroyed two of the fundamental assumptions on which all accounting is based.
The problems hardly end there. Should the general health level of the population be considered a societal asset and thus figure into the government balance sheet somewhere? Then there’s the matter of the appropriate time horizon. While a corporation has, in theory, a perpetual life, as a practical matter it isn’t too disruptive to send future values to zero fairly quickly. That’s not true for governments, which has the consequence that trivial differences in assumptions can make enormous differences in asset and liability values. And that’s just the balance sheet questions. Does the concept of net income even have meaning in conjunction with the federal government?
I’d be happier if we ditched talk of government accounting altogether when it comes to the feds. Keep doing modeling so that we have some idea of what the future potentially holds, but stop trying to pretend that we can accurately measure the values. Call it government budgeting instead, because that’s the framework in which something like accounting has value in this context.
Wow. And I was just worrying about the piddly little issues like the fact that there’s no real distinction between capital and operating budgets, and no allowance for depreciation of tangible (much less intangible) assets.
I like the time-horizon issue: on the one hand, by assuming appropriate discounts you can get anywhere; on the other, the supernova problem.
We need some type of accounting. It is possible that the trust fund accounting approach shouldn’t be continued, but even a change cannot mask long term funding problems for key programs given historical levels of taxation. We need to pay attention to the fiscal status of the federal budget, it is just that sometimes that swamps out other important issues.
And despite the mean spirited and snide remarks endemic to this blog site, it is the Party of Lincoln that has demonstrated concern about our fiscal status.
We need to pay attention to the fiscal status of the federal budget . . .
Hence the need for modeling and projections. But that’s not really the same thing as accounting. Spending your time matching debits and credits for federal government accounts doesn’t really make any sense, except for perhaps some instances of internal budgeting.
One of the underlying assumptions of accounting is the achievement of a level of precision that can often (though certainly not always) be sufficiently approximated in a corporate context. It doesn’t exist for an entity like the federal government. If you use accounting assumptions, you will mislead more than you enlighten yourself.
To produce a useful system of accounting for the federal government, you are going to have to go *way* back to square one and ditch the idea of precise figures and go with some sort of probabilistic framework. At that point, you find yourself in a semantic debate over whether what you are doing is accounting at all. And I despair at the idea of having meaningful public policy debates based on what you’ll have given that we can’t seem to even manage to grasp the idea of having three different projections for the social security trust fund.