August 19, 2010
By Edwin J. Feulner, Ph.D.
In Washington, politicians often give their bills clever names designed more to obscure than to reveal.
Consider the CLASS Act. It sounds like yet another federal attempt to meddle in local schools. Instead, it stands for “Community Living Assistance Services and Support.”
CLASS was a little-noticed part of the massive Obamacare bill that the president signed in March. It’s supposed to provide affordable long-term care insurance to American workers. In reality, it creates another entitlement likely to increase our exploding federal deficit.
Starting next year CLASS is scheduled to begin enrolling people and collecting premiums. If CLASS was a normal insurance program, it would invest these premiums to build reserves. These reserves would later be tapped to provide benefits for those individuals in need of long-term care services.
But CLASS doesn’t work that way.
Similar to Social Security, all premiums that CLASS collects will be spent immediately. Its trust fund will be filled with government IOUs. Since participants need to pay five years of premiums before they’re eligible to collect any benefits, a sizeable amount of short-term revenue will be raised from CLASS. This aspect was especially useful when lawmakers were trying to find tricks to reduce the projected cost of Obamacare. By including the revenues from CLASS, politicians were able to pretend they’d reduced the cost of the bill by $70 billion.
But even Uncle Sam can’t spend your money twice. It’s impossible to spend the money today on government programs and invest the money to fund eventual benefits.
Eventually 2017 will arrive. That’s when CLASS starts paying benefits. It’s difficult to predict how soon after that the program would dive into the red and pay out more in benefits than it collects in premiums. Actuaries at the Centers for Medicare & Medicaid Services estimate it could be as soon as 2025.
CLASS is structurally unsound because it requires identical premiums for individuals of the same age, regardless of health status. Healthy people will thus be charged an unfair amount, making them unlikely to enroll. Sick people, meanwhile, are more likely to enroll. A sicker risk pool would necessarily force premiums higher, making it even less attractive to healthy people. This is often referred to as an “adverse selection death spiral”.
Actuaries who have analyzed CLASS believe that premiums will be insufficient to fund benefits. This raises the possibility that CLASS will put taxpayers on the hook for a bailout of this program and/or beneficiaries will receive less than they were promised.
Surprised? Lawmakers aren’t. They knew about these dangers when they voted for the CLASS Act.
Sen. Kent Conrad, D-N.D.
, called it “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” Five other Democratic Senators joined Conrad in a letter that said, “We have grave concerns that the real effect of the provisions would be to create a new federal entitlement with large, long-term spending increases that far exceed revenues.”
Unfortunately, they all eventually voted “yes” on Obamacare. But the bipartisan opposition to CLASS is evidence that its repeal is possible.
The program hasn’t taken effect yet, so there’s still time for lawmakers to fix their mistake and repeal the CLASS Act. Better yet, they should scrap Obamacare entirely and fix health care one small step at a time. The alternative is to burden Americans with massive expansion of government interference in health care that we can’t afford.
Dr. Edwin Feulner is president of The Heritage Foundation.
Edwin J. Feulner, Ph.D.
Founder, Chairman of the Asian Studies Center, and Chung Ju-yung Fellow
Read More >>
Request an interview >>
Please complete the following form to request an interview with a Heritage expert.
Please note that all fields must be completed.
Heritage's daily Morning Bell e-mail keeps you updated on the ongoing policy battles in Washington and around the country.
The subscription is free and delivers you the latest conservative policy perspectives on the news each weekday--straight from Heritage experts.
The Morning Bell is your daily wake-up call offering a fresh, conservative analysis of the news.
More than 450,000 Americans rely on Heritage's Morning Bell to stay up to date on the policy battles that affect them.
Rush Limbaugh says "The Heritage Foundation's Morning Bell is just terrific!"
Rep. Peter Roskam (R-IL) says it's "a great way to start the day for any conservative who wants to get America back on track."
Sign up to start your free subscription today!
The Heritage Foundation is the nation’s most broadly supported public policy research institute, with hundreds of thousands of individual, foundation and corporate donors. Heritage, founded in February 1973, has a staff of 275 and an annual expense budget of $82.4 million.
Our mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. Read More
© 2014, The Heritage Foundation Conservative policy research since 1973