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.