Not a CLASS Act

When President Obama’s health care proposal was being debated we were repeatedly told that the “The president’s plan represents an important step toward long-term fiscal sustainability.” Indeed, a key turning point in the bill’s progress was when the CBO scored it as reducing the deficit by $130 billion over 10 years making the bill’s proponents positively giddy, as Peter Suderman put it at the time. Of course, many critics claimed that the cost savings were gimmicks but their objections were overruled.

One of the budget savings that the critics claimed was a gimmick was that a new long-term care insurance program, The Community Living Assistance Services and Supports program or CLASS for short, was counted as reducing the deficit. How can a spending program reduce the deficit? Well the enrollees had to pay in for at least five years before collecting benefits so over the first 10 years the program was estimated to reduce the deficit by some $70-80 billion. Indeed, these “savings” from the CLASS act were a big chunk of the 10-yr $130 billion in deficit reduction for the health care bill.

The critics of the plan, however, were quite wrong for it wasn’t a gimmick, it was a gimmick-squared, a phantom gimmick, a zombie gimmick:

They’re calling it the zombie in the budget.

It’s a long-term care plan the Obama administration has put on hold, fearing it could go bust if actually implemented. Yet while the program exists on paper, monthly premiums the government may never collect count as reducing federal deficits.

Real or not, that’s $80 billion over the next 10 years….

“It’s a gimmick that produces phantom savings,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates deficit control..

“That money should have never been counted as deficit reduction because it was supposed to be set aside to pay for benefits,” Bixby added. “The fact that they’re not actually doing anything with the program sort of compounds the gimmick.”

Moreover, there were many people inside the administration who thought that the program could not possibly work and who said so at the time. Here is Rick Foster, Chief Actuary of HHS’ Centers for Medicare and Medicaid Services on an earlier (2009) draft of the proposal:

The program is intended to be “actuarially sound,” but at first glance this goal may be impossible. Due to the limited scope of the insurance coverage, the voluntary CLASS plan would probably not attract many participants other than individuals who already meet the criteria to qualify as beneficiaries. While the 5-year “vesting period” would allow the fund to accumulate a modest level of assets, all such assets could be used just to meet benefit payments due in the first few months of the 6th year. (italics added)

So we have phantom savings from a zombie program and many people knew at the time that the program was a recipe for disaster.

Now some people may argue that I am biased, that I am just another free market economist who doesn’t want to see a new government program implemented no matter what, but let me be clear, this isn’t CLASS warfare, this is math.

Hat tip: Andrew S.


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