A Third-Party Policy Agenda to Make Americans Financially Secure Again
A blueprint of policies that would reduce student debt, expand health insurance coverage, help people to save for retirement and restore solvency to the Social Security system.
Introduction:
Despite relatively robust economic growth for the last 15 years, more and more American households are falling behind financially, having trouble paying off student debt in a timely manner, struggling to maintain insurance coverage, pay out-of-pocket health costs, and save for retirement. Neither the Republican nor Democrat party appear to have viable solutions to these problems.
The modern Republican party appears entirely focused on tax cuts, primarily for the wealthy and has no real ideas or interest in resolving financial problems impacting American households.
The Biden/Harris wing of the party appears more interested in mollifying the progressive wing of the party than in crafting cost-efficient practical solutions.
Major problems impacting the financial health of American households are not being addressed in the current political environment.
· Several Biden Administration student debt programs have been overturned or delayed by the courts. The incoming Trump Administration will roll back existing student debt programs.
· The Biden Administration did not prioritize major expansions of the ACA. The progressive wing of the party remains committed to Medicare-for-All even though this proposal is economically and politically impractical.
· Most retirees are highly dependent on Social Security, a system that cannot maintain current benefits past 2035. Issues related to the solvency of the Trust fund were barely discussed during the 2024 campaign.
· Student debt and medical debt are preventing younger workers from saving for retirement making it hard to justify modifications to the retirement age, even in the distant future.
· Recent efforts to expand use of 401(k) plans, do more to benefit Wall Street firms than assist households attempting to save for retirement.
The two-party system is incapable of providing solutions to these problems. This memo describes current Democrat and Republican positions on financial issues and proposes viable third-party alternative policies.
Student Debt:
Background:
The Republican and Democrat party have drastically different views on existing programs and proposals on the reduction of student debt burdens.
Most Republicans in Congress and the incoming Trump Administration do not support existing programs offering student debt relief or expansion of these programs. The primary concern of the Republican party appears to be reduction of tax burdens.
Student debt collection efforts, which were halted since COVID, will soon restart.
The incoming Trump Administration will halt pending Biden Administration student debt initiatives, will attempt to reverse the newly enacted SAVE loans, and may seek the repeal of the PSLF program.
The Biden Administration had aggressively moved forward on assuring eligible students received timely discharges under the IDR or PSLF programs. The Biden Administration has also moved to discharge loans for students that were defrauded by some non-profit schools
More generous Biden Administration efforts to expand loan discharge efforts were overturned or have been delayed by the courts. The Supreme court overturned a Biden program which could have cancelled up to $20,000 in debt for student borrowers in response to a national emergency. A second effort to provide more debt relief through executive orders has been delayed by the courts and will be cancelled by the incoming Trump Administration.
The progressive wing of the party is seeking even more expansive loan discharge programs. For example, Senator Sanders has a proposal that would forgive all student debt and Elizabeth Warren has a proposal for eliminating most student debt held by all households making less than $250,000 per year.
Many of the people who would receive student debt relief under the Sanders and Warren proposals are currently able to afford their student debt payments.
Candidate Biden’s initial 2020 position on student debt was relatively modest. His general election positionand the Administration’s recent proposals, which as noted have been overturned or stalled by the courts, may be efforts to unify the party, not serious efforts to reduce student debt burdens. Part of me believes that given Biden’s initial 2020 campaign position on student debt relief, the administration was happy their more ambitious programs were blocked by the court.
The third party recognizes the need to assist overextended student borrowers who are unable to service their student debts, because many young adults with high student debt burdens are unable to save for emergencies, a home, and retirement. However, the existing patchwork system of IDR and conventional loans is not economically efficient and often fails to provide the necessary economic relief.
The alternative program considered here better serves both taxpayers and student borrowers.
Key Features of the Third Party Student Loan Program:
· Zero interest on all conventional student loans during the first three years of loan repayment.
· Eliminate the deductibility of interest on student loans.
· Mandate a small but non-zero monthly payment on IDR loans and conventional loans in deferment.
· Delay entry into IDR loan programs until completion of three years of conventional payments.
· Modify IDR loan discharge provisions by allowing for partial discharges of IDR loans after three or four years of payments.
· Convert IDR loans to zero-interest conventional loans 12 years after initial loan repayments.
· Impose tax penalties on student borrowers not making minimum payments on zero-interest loans.
· Discharge remaining student debt 25 years after initiation of repayment.
· Subject final discharge on IDR loan to federal income tax.
Analysis:
IDR loan discharges are costly to taxpayers. The abolition of interest on student loans during early years of repayment when starting salaries are low will shift demand towards conventional loans away from costly IDR loans and will partially recoup the cost of the new subsidies.
The tax deductibility of student loan interest favors higher-income borrowers and does little to assist student borrowers who are most in need of assistance. Its abolition will offset the cost of new subsidies.
The current system, by forcing student borrowers to choose between IDR and conventional loans immediately after leaving school with little information about their future household income and marital status, creates substantial financial uncertainty regarding the total cost of student loan repayments. The third-party student loan agenda reduces financial risks, associated with IDR and SAVE loans, as discussed in detail here.
Two quick points:
· Married IDR borrowers who experience changes in household income, or marital status end up paying more on their student loan or taxes during the lifetime of their loan.
· SAVE borrowers with a two-year degree have a financial incentive to forego additional education.
The current system results in some borrowers increasing the initial amount they borrow without repaying more. The third-party program by relying more on zero interest loans than on discharges and by taxing end-of-loan discharges assures that people who borrow more will repay more.
Loan servicers often do not automatically provide student loan discharges because of disputes over previous loan payments. The third-party student loan program rectifies these problems.
· The provision in the third-party student debt relief effort for a partial discharge three or four years after repayment begins will force earlier discovery and resolution of payment disputes.
· The provision in the third-party student debt relief program for a minimum monthly payment will allow loan servicers to distinguish between borrowers who are current and borrowers who are delinquent. (Past monthly payments could be zero for both current and delinquent borrowers under the current system.)
The current system is subject to a substantial amount of political risk because recent history suggests that Republican Administrations are less likely to assure that borrower receive debt relief than Democrat Administration. The incoming Trump Administration will scrap current Biden Administration initiatives and may roll back the SAVE program.
The third-party student debt program could eliminate political risk and offers the opportunity for more stable and predictable financial outcomes.
Health Insurance: The 2020 contests for the Democrat nomination for president was dominated by a debate between the progressive wing of the party that wanted Medicare-for-all and the centrist wing of the party which advocated for expansions to the ACA.
Additional health care reform has not been a major priority of the Biden Administration. Biden era health care achievements include a temporary expansion of the premium tax credit, an executive order fixing the family glitch governing affordability of health insurance, and an executive order limiting short term health plans.
The Biden team may have shied away from more ambitious health care reforms for two reasons. First, they did not want to anger the progressive wing of the party, which remains wedded to Medicare-for-all even though this proposal would disrupt both health care for most of the population and a major sector of the economy. Second, the Biden Administration probably did not have any good ideas on how to improve health insurance outcomes and expand insurance coverage without blowing up the deficit.
Trump, in the debate, acknowledged he also only has “concepts” of a health care plan.
The third party has concrete proposals, which will reduce spiraling out-of-pocket health care costs, expand the number of households with continuous health care coverage, and lower insurance premiums.
First, consideration is given to the third-party proposals for reduction of out-of-pocket costs and then consideration is given to proposals for expanding and improving health insurance coverage.
Key Features of the Third Party Health Initiatives on out-of-pocket health costs:
· Replace the lose or use stipulation governing health savings accounts with a rule that allows recipients to keep unused funds either in a flexible savings account or in a non-deductible IRA.
· Allow people obtaining state exchange health insurance to own and contribute to a flexible savings account.
· Create a tax credit for contributions to health savings accounts and flexible savings accounts.
· Expand use of health savings accounts to health plans with other cost-sharing features.
· Exempt payments for medicines used for chronic conditions from high-deductible health plan deductibles.
Analysis:
Many people attempt to pay for out-of-pocket health expenses by contributing tax-deductible funds to a flexible savings accounts.
Current law requires that owners of flexible savings account forfeit unused funds in the account to the Treasury at the end of the year. The third-party proposal for ending or modifying the use-or-lose stipulation would facilitate increased savings for health care and for retirement.
Current law only allows people with employer-based health insurance to open and use a flexible savings account. The third-party proposal allowing the use of flexible savings accounts for people with state-exchange insurance and the modification to the use-or-lose rule would help more people save for health care and retirement. The version of this proposal, allowing the transfer of these funds to a non-deductible IRA would reduce the conflict between saving for health care and saving for retirement.
Contributions to flexible savings accounts are not subject to federal income tax, Social Security or Medicare tax or most state income taxes. One way to reduce the revenue impact of the expansion of the abolition or modification of the use-or-lose stipulation is to tax the amount of the rollover.
Current rules governing the use of health savings accounts require the owner to have a high-deductible health plan even when other forms of cost share might be more effective. The third-party health provision would allow for people with other types of health plans to open and contribute to a health savings account.
Many current high-deductible health plans do not allow any payment for medicines used to treat chronic diseases until after the deductible is met. Since many low-income people insured by high-deductible health plans do not fund their health savings accounts the high-deductible impedes treatment of chronic conditions, thereby worsening the health of the insured. The provision allowing and maybe mandating insurance expenditures for these drugs would reduce the number of people forgoing treatment for chronic conditions. Go here for a previous memo on issues related to health savings accounts and high-deductible health plans.
The growing use of flexible savings accounts and health savings accounts has provided greater benefits to high-income than low-income or middle-income households because higher-income people have more disposable income, and because the exemption from federal income tax provides a larger benefit for higher income households. The replacement of the current tax exemption of contributions with a tax credit would stimulate use of these accounts by lower-income households.
Key Features of the Third-Party Initiative on Insurance Coverage, Cost and Quality
· Change tax rules and incentives to allow for subsidies for the purchase of state-exchange health insurance for employees of businesses with fewer than 100 employees.
· Create a lower cost state-exchange health insurance option by directly subsidizing health care expenditures on high-cost patients.
Analysis:
The ACA created state-exchange health insurance markets for people without health insurance but retained incentives for employers to maintain employer-based health insurance coverage for most of the working-age population. The third-party health care agenda includes a proposal that allows and facilitates employer subsidies for the purchase of state-exchange health insurance instead of employer-based health insurance. The long-term goal is to essentially merge employer-based and state-exchange health insurance markets.
Employer subsidies for employee state-exchange health insurance have several advantages over traditional employer-based coverage.
· Employees who switch jobs or are terminated can keep their current health insurance plans.
· State exchanges offer a wider range of plans while many employers only offer a single option. Employees with an employer subsidy for state-exchange insurance could pick the plan that best suits their needs.
· The use of employer subsidies for state exchange insurance reduces costs to employers who would otherwise have to sponsor their own plan.
· The addition of households to state exchange health insurance markets would expand the risk pool leading to lower costs and better coverage.
The ACA substantially reduce the number of uninsured Americans but around 7.7 percent of the working-age population, over 25 million people remain uninsured. The primary reason many people go without health insurance coverage is the cost of premiums. The third-party health care agenda would seek to reduce premiums on state exchanges by creating a new government subsidy that would cover part of the cost of more expensive health care cases.
The new subsidy would improve health plan quality and health outcomes for households seeking treatments.
· The subsidy would reduce demand for short-term health plans that fail to cover many procedures and reduce financial exposure. Go here for details on the case for the elimination of short-term health plans.
· The subsidy would reduce the tendency for health plans to deny or delay coverage for particular treatments, a problem highlighted by the recent killing of the UnitedHealth CEO.
Go to the memo ACA 2.0 for additional thoughts on the next steps for health care reform.
Private Retirement Savings: Most households are not saving nearly enough for retirement. Most retirees are highly dependent on Social Security. Young adults are reducing their savings for retirement and are increasingly distributing funds from their retirement plan early in life to maintain current consumption.
The retirement savings problem is inter-related with the student debt and the health insurance problems because people saddled with student debt and medical debt have great difficult in saving for retirement.
Both Republicans and Democrats, in a relatively rare act of bipartisanship, have come together to enact laws that would increase use of 401(k) plans. But the bipartisan plan sucks.
Many of the provisions of the recently enacted Secure Act 2.0 appear to provide larger benefits to Wall Street firms managing 401(k) plans than workers struggling to save for retirement.
The third-party private retirement savings agenda targets workers who do not have access to 401(k) plans, attempts to reduce leakages from existing retirement accounts, reduce retirement account fees, and improve retirement plan investment options.
Key Features of the Third Party Private Retirement Savings Initiative:
· Mandate automatic rollover of smaller 401(k) accounts to Individual Retirement Accounts when employees depart a firm.
· Place a ceiling on fees on IRAs receiving funds from the automatic rollover of an IRA.
· Restrict pre-retirement withdrawals from 401(k) plans and Individual Retirement Accounts.
· Incentivize people to start an IRA when young, say by age 20.
· A universal tax credit to jump start retirement savings for all households.
· Automatic enrollment and contributions to IRAs, patterned after automatic enrollment in 401(k) plans.
· Expansion of the SAVERS credit.
· Allow direct investment of SERIES I Bonds in retirement accounts.
Analysis:
Many employees, especially younger ones, automatically disburse funds from their 401(k) plan when they switch jobs. These premature distributions could increase in number now that 401(k) automatic enrollment exists. Automatic transfers to Individual Retirement accounts for departing workers would reduce pre-retirement leakages from retirement plans.
Some workers switching jobs leave their funds in a high-fee 401(k) plan where the fund balance is quickly eroded. The stipulation that transferred funds be placed in a lower-fee Individual Retirement Account will substantially increase wealth at retirement. Go to this memo for a discussion of the impact of fees on eventual retirement wealth.
Current tax law taxes and penalizes some withdrawals from retirement accounts but does not prohibit the complete withdraw of all funds and the closure of the account. The tax advantages of retirement savings are considerable. The third-party platform states that at least a portion of a retirement account receiving tax incentives should be used for spending in retirement.
One of the impediments to saving for retirement is that some people, for a variety of reasons, never start saving. A one-time tax credit for the creation of an initial IRA at a young age could assure that everyone at least starts the process of saving for retirement. The saver would be prohibited from withdrawing the seed money for the initial IRA until retirement.
Current rules governing retirement plans savings favor higher-income workers at firms that offer a generous 401(k) plan over low-income and mid-income workers at firms without a 401(k) plan. It would be reasonable to pay for new tax incentives for workers without 401(k) plans with some restrictions on tax incentives for workers without employer-based coverage. This reallocation is similar to the approach offered by Biggs and Munnell, who advocate the reduction of 401(k) spending to shore up Social Security.
The Secure Act 2.0 mandated automatic enrollment with an opt-out provision in 401(k) plans.
A similar automatic enrollment and opt-out feature can be applied to worker Individual Retirement Accounts at firms not offering employer-based retirement coverage.
The Saver’s Credit, designed to help low-income and middle-income taxpayers save for retirement should be expanded and should be automatically implemented for eligible taxpayers.
Fixed income funds, commonly used in both 401(k) plans and IRAs, do not perform well when interest rates rise. This memo, workers shows the substantial deterioration in wealth realized by 2021 retirees who invested in a 60/40 portfolio. This problem could have been avoided if retirement plan investors were allowed to invest in Series I Savings bonds. Go here for a discussion of the advantages of Series I Bonds.
Financial Status of the Social Security Trust Funds: The trustees of the Social Security system project, absent corrective actions, the total depletion of assets in the Social Security trust fund will trigger an automatic 17 percent decrease in benefits. This event would have a tremendous impact on beneficiaries, who are highly dependent on Social Security.
Politicians in both political parties have discussed proposals to address the pending shortfall in Social Security and pending benefit cuts but there is no sense of urgency on this issue.
The issue was largely unaddressed in the 2024 general election political campaign.
Democrats tend to favor proposals that increase revenue going to the system while Republicans have advocated for reforms that alter benefits. Some of the Democrat proposals increase revenue and also increase benefits.
President Biden has favored subjecting all income over $400,000 to the payroll tax and has adamantly opposed any Social Security benefit cuts or any increase in the retirement age.
The proposal offered by Senator Sanders would lift the cap on the Social Security payroll for people making over $250,000, increase the net investment income tax to 12.4 percent, and increase benefits including the Cost of Living Adjustment.
In the past, Republicans have been highly concerned with fiscal pressures stemming from the need to finance Social Security benefits.
President Bush’s proposal would have substantially transformed the current system by creating private accounts for part of the benefit.
In the contest for the 2024 Republican presidential nomination contest, two candidates Nikki Haley and Chris Christie favored a gradual increase in the Social Security retirement age. These proposals were NOT endorsed by Donald Trump, the person who will become the 47th president.
President Trump and the candidates who were most closely aligned with him appear more concerned with economic growth and the general budget deficit than the Social Security problem.
Key Features of the Third-Party Social Security reform agenda:
· Plan includes both increases in trust fund revenue and gradual increases in the retirement age.
· Plan offsets the higher retirement age by improved incentives for private retirement spending. I believe this program can be revenue neutral or close to revenue neutral. See section above.
· Gradually raise the retirement age for Social Security benefits over a 24 year period. Retirement ages goes up by one month every two years.
o Earliest retirement age goes from 62 to 63.
o Full retirement age goes from 67 to 68.
o Increased benefits with actual retirement will continue to stop at age 70.
· Expand and Increase Net Investment Income Tax for restoration of trust funds
o Apply Net Investment Income Tax to any person paying capital gains tax
o Highest possible Net Investment Income Tax rate would be 7 percent with part of tax allocated to Social Security and Medicare
o Expand capital gains and Net Investment Income Tax by reducing amount of capital gains on principal residence exempt from tax and by eliminating 1031 exchanges
o Reduce capital gains taxes on principal homes by three percentage points.
· Apply the existing payroll tax to households making more than $400,000 per year.
Analysis:
The third-party plan includes both benefit adjustments and new revenue. Efforts to fix this problem, either entirely with revenue changes or benefit changes are not grounded in reality.
The proposal for a gradual increase in the retirement age would not prevent pending automatic cuts to benefits, because it would take decades for the full impact of the retirement age changes to be realized and the Trust fund will soon be out of assets.
Democrats do not have the votes for a proposal that relies entirely on new revenue and such a proposal would likely reduce economic growth.
The third-party approach includes a gradually phased in retirement age, substantial new revenue, the reallocation of some existing revenue streams from the general fund to the Trust funds and some new revenue.
Both the original net investment income tax, used to fund the ACA tax and the additional Medicare tax were initiated in 2013. The third-party proposal earmarks increases in the net investment income tax towards the trust fund. It offsets part of the increase in the net investment income tax though reductions in capital gains taxes. It also expands the number of households paying capital gains and/or net investment income taxes
· The lower capital gains tax rate would encourage people to continue to take gains. (There is some economic literature suggesting that capital gains and net investment income tax realizations fall when tax rates are increased.)
· Current law limits the net investment income tax to higher income taxpayers. The revised program cuts capital gains taxes but applies the net investment income tax to all taxpayers. This provision will reduce funds available for general discretionary spending and would, absent additional spending changes, increase the discretionary budget deficit.
· The revised program broadens the tax base for both capital gains and the net investment income tax by reducing the amount of the capital gain on the principal residence exempt from the capital gains tax and by eliminating 1031 exchanges.
Concluding Thoughts: The 2024 political campaigns has reinforced my view that the Democrat and Republican parties are incapable of putting forward policies that would improve the financial condition of American households.
The Republican party has consistently ignored rising student and medical debt levels and has been unconcerned with gaps in health insurance coverage leading to higher medical debt.
The Haley and Christie proposals for a higher Social Security retirement age assume that younger workers will save more for retirement. This won’t happen because of the upward trajectory in student debt and medical debt.
The progressive wing of the Democrat party is wedded to impractical and expensive student debt relief and health care proposals. Centrist student debt proposals, which have been blocked by Congress and the courts appear to be designed to mollify the progressive wing of the Democrat party. Progressives remain wedded to Medicare-for-all, and centrists have failed to put forward a substantial viable expansion to the ACA.
A bipartisan coalition of Democrats and Republicans adopted changes to incentives governing private retirement plans that do more to bolster demand for Wall Street services than assist households struggling to save for retirement. Both political parties chose to downplay problems with Social Security and Medicare in the 2024 campaign despite the fact these programs are careening towards a fiscal cliff that could be politically destabilizing.
It is time for a new approach. My blog will remain focused on constructing a third-party agenda, which could move the nation forward. If you want to support this effort subscribe to this blog. Money spent on this subscription is money better spent than money spent on a political contribution to the Democrat or Republican party.