Episode 491: The Debt Ceiling, Obamacare And Welfare

Oct 16, 2013
Originally published on October 16, 2013 3:21 pm

On today's show: Three ripped-from-the-headlines stories from Planet Money.

What A U.S. Default Would Mean For Pensions, China, And Social Security

If the government defaults on its debt, people all over the world who have loaned the government money won't get paid on time.

One Key Thing No One Knows About Obamacare

Obamacare won't work unless healthy people buy insurance. No one knows whether they will.

Is Welfare A Rational Alternative To Work?

A new paper argues that the value of various welfare benefits add up to well over $30,000 a year. People on welfare disagree.

Note: These stories initially aired on the radio. Music: Black Joe Lewis & The Honeybears' "I'm Broke" and M83's "Steve McQueen." Find us: Twitter/ Facebook/Spotify/ Tumblr. Download the Planet Money iPhone App.

Copyright 2016 NPR. To see more, visit http://www.npr.org/.


Hey, Zoe.


Hi, David Kestenbaum.

KESTENBAUM: All right, so today is Tuesday October 15. It's, like, quarter of 3.

CHACE: Just about.

KESTENBAUM: And as we record this, the government is still partially shut down.

CHACE: That's right.

KESTENBAUM: Which means, among other things, kids can't go to the zoo.

CHACE: There are researchers who cannot go to Antarctica.

KESTENBAUM: Visas, you know, if you want to come to the United States - visas that are already famously hard to get - they are even harder to get right now.

CHACE: Astronauts are still in space. They are still at work. But when they call back to Earth at mission control, there's just a couple of people there for them to talk to.

KESTENBAUM: So there's that, there's also this debt ceiling thing happening. If Congress doesn't do something about it, the U.S. is in danger of what is known as a sovereign default, meaning we will miss a payment to people who have very kindly lent us money.

CHACE: We're basically going to stiff all our creditors.

KESTENBAUM: All the very kind people who lent us money by buying bonds, some of them are in danger of maybe not getting paid on time. If that happens it's a big thing. Democrats and Republicans generally agree that would be a really stupid thing to do, and yet we're headed toward it as a possibility.

CHACE: Yes, it's a very exciting time. Another thing that's going on at this exact moment is Obamacare is here. And Obamacare is undergoing this big test. The health care exchanges, which are part of the Affordable Care Act, they have just recently opened for business.

KESTENBAUM: Hello and welcome to Planet Money. I'm David Kestenbaum.

CHACE: I am Zoe Chace. And today, we have the Planet Money take on three stories that are in the news at the moment - the debt ceiling, Obamacare and a debate over welfare.


KESTENBAUM: All right, first up, the debt ceiling. What would actually happen, we were wondering, if the U.S. defaulted on its debt?

CHACE: What would happen is a bunch of people who have lent the U.S. government money, they would not be paid back.

KESTENBAUM: So we were wondering who are these people and how do they feel about that?

CHACE: And here's your story, David.

KESTENBAUM: The people who have lent the U.S. government money, there is another name for them - U.S. bondholders. That's what a bond is, after all, a loan. Someone buys a U.S. Treasury bond, they are loaning that money to the U.S. government with the assumption that they will get their money back plus interest on time. This first group of U.S. bondholders, I don't really need to introduce you to them because they are us. If you have a pension plan or a retirement account, chances are that you have lent the U.S. government money because those funds likely own treasury bonds.

I talked with Tony Crescenzi at a company called PIMCO, which manages a lot of retirement money. I asked of the billions of dollars worth of bonds they have, how many are due to pay out money around the Treasury's debt ceiling date of October 17?

TONY CRESCENZI: I think zero, so we've been avoiding them.

KESTENBAUM: PIMCO intentionally owns no Treasury bonds that are due to pay out any money between October 17 through the beginning of December. A lot of PIMCO clients can't risk getting paid late. Some need the money to pay employees. Others need to send out pension checks, in which case, Crescenzi says, why mess around with bonds due on or just after October 17?

CRESCENZI: There's de minimus risk of not getting paid on time, but it exists. And why take the chance?

KESTENBAUM: There is another group of bondholders less concerned with getting paid on time that is using Treasury bonds basically as a mattress, a place to stick extra cash. Shang-Jin Wei is an economist at Columbia Business School. He says China in particular has a lot of dollars in Treasury bonds.

SHANG-JIN WEI: The best estimate is about $1.2 trillion.

KESTENBAUM: That's a big number.

WEI: It is a big number (laughter).

KESTENBAUM: And how would the Chinese government feel if the U.S. defaulted?

WEI: Well, they won't like it. In the short run there's very little they can do.

KESTENBAUM: Shang-Jin Wei says if the U.S. defaults, he imagines it would be brief. The U.S. would say we can't pay you right now. We will pay you as soon as we can. But even that could have long-term consequences, he says. China and others might down the road start to shift some money out of U.S. bonds. If that happens, if U.S. bonds become less popular, the U.S. government might have to start paying higher interest rates in order to get people to buy them, which, weirdly, could help another big U.S. bondholder, our own Social Security Administration.

Michael Astrue ran the Social Security Administration under President George W. Bush and President Obama. I asked him what a U.S. default would mean.

MICHAEL ASTRUE: First of all, let me just be clear that I think that would be a very bad thing to do. And I'm keeping my fingers crossed it doesn't happen because it would create a lot of wreckage in the country as a whole. But for Social Security in isolation, it would have its benefits.

KESTENBAUM: That's because the Social Security trust fund - over $2 trillion - all gets invested in U.S. Treasury bonds. So if the next bonds that the fund buys pay higher interest...

ASTRUE: That would benefit the solvency of the Social Security trust fund because right now, the disability fund is due to be insolvent in 2016 and the retirement fund is due to be insolvent in 2033.

KESTENBAUM: Astrue notes one rather large caveat. If a U.S. default ends up really hurting the economy and sending us into recession, that would mean less money in people's paychecks and, as a result, less money coming into the Social Security fund.


BLACK JOE LEWIS AND THE HONEYBEARS: (Singing) I'm broke, everybody know that all my troubles with the money. I'm broke...

KESTENBAUM: Zoe, you know what I'm going to do when I go back to my desk?

CHACE: What?

KESTENBAUM: I'm going to try and buy one of those Treasury bonds that is due to be paid off, like, October 31, which is right in a middle of, like, the red zone where if we default that's one of the bonds that might not get paid back.

CHACE: Oh, really (laughter)?

KESTENBAUM: Do you know how much they cost? So the deal is, like, if everything's fine you'll get a thousand bucks back. And you can buy one of these bonds for $999.98, meaning the world right now is not at all worried. If you buy a Treasury Bond, like, what you'll make in three weeks is two pennies by lending the government a thousand bucks.

CHACE: That just means that they are very popular still.

KESTENBAUM: They're still very popular. We are still the world's mattress. All right, the next story's about Obamacare and those health care exchanges that recently went live. These are places where people who don't have insurance supposed to be able to go online and compare plans and actually buy insurance. And a lot of the news stories have focused on, you know, the glitches and how long it takes and how the systems are all overwhelmed and crashing. But, you know, really there is a much bigger question that we still don't know the answer to.

CHACE: Who is going to sign up for these things? And, David, you tried to answer this question.

KESTENBAUM: No one really knows who is going to sign up - not the Obama administration, not the insurance industry, not the critics. And really the success of the law hangs on this question. Will the right mix of people sign up? Will healthy people who rarely see a doctor, will they buy insurance?

ROBERT LASZEWSKI: The danger if you don't get young healthy people signing up or if you don't get healthy people generally signing up is that this program will collapse.

KESTENBAUM: This is Robert Laszewski, president of Health Policy and Strategy Associates. He advises insurance companies.

LASZEWSKI: We actually have a term for it in the insurance industry. We call it a death spiral. And many health insurance companies have had death spirals, so this isn't a theoretical exercise.

KESTENBAUM: A death spiral is where sick people sign up and it costs a lot to take care of them. So the insurance company has to charge more for the insurance plan the next year. But then only the really sick people sign up that year, so the insurance company has to raise prices again. The same thing happens the next year, and eventually the whole thing falls apart.

LASZEWSKI: And that is the real challenge that Obamacare faces. If we don't get a good cross-section of healthy and sick signing up to take care of each other here, this thing is not sustainable.

KESTENBAUM: How worried are you that that might happen?

LASZEWSKI: I'm very worried that that might happen. I'm particularly worried in states where there hasn't been political support for this.

KESTENBAUM: The designers of the Affordable Care Act, of course, were well aware of the death spiral danger or of an overload of sick people pushing the insurance prices up. That is why the Affordable Care Act has both a carrot and a stick to encourage people to sign up. The stick is that penalty or fee for people who don't buy insurance. But the stick is pretty small in the first year. There is that carrot, though, and it's a pretty big carrot - subsidies.

ZEKE EMANUEL: It's a great deal. It's just that simple.

KESTENBAUM: Zeke Emanuel was one of the architects of the Affordable Care Act. He says for a lot of people, the subsidies are substantial.

EMANUEL: For an individual making between 15 and about $20,000, this is - you know, get health insurance 80 percent off. Where do you see sales like that?

KESTENBAUM: Various groups have tried to model how this will all shake out. Zeke Emanuel says that from what he's seen, he thinks everything will be OK, that in most places enough healthy people will eventually sign up for the whole thing to work - eventually. It could take months or even years before we know.

Sherry Glied is an economist at NYU's Wagner School. She's worked for the first Bush administration and the Clinton and Obama administrations. She says the very first people to go online, most of them probably won't be those healthy and younger folks.

SHERRY GLIED: Think about it this way, the first people who sign up are the people for whom buying health insurance was the number one thing on their to-do list. And buying health insurance is the number one thing on your to-do list if you expect that you're going to be sick.

KESTENBAUM: Younger people, she figures, will sign up later. Maybe they'll be home for the holidays and their parents will say, so do you have health insurance?

CHACE: OK, so it's been a couple weeks since these things opened. So do we actually know now? Are the healthy people coming? Like, what's the deal?

KESTENBAUM: We still don't know. I haven't seen any summaries of, like, who is signed up. And, really, like, it may not be till the next year that you know because there are people who the first year, you know, the penalty is not so bad so they may be, like, oh, I won't sign up.

CHACE: Right.

KESTENBAUM: They're very young and just out of college or something. And then, you know, as the penalty starts to kick in and get more severe, you may see this people sign up. So you really won't know the mix of people who've signed up for insurance through these exchanges. It could be quite a while before it kind of stabilizes.

CHACE: So what about, for instance, like, our intern Seth? I know he doesn't have health insurance - not through NPR. Does he have it now?

KESTENBAUM: He says he still does not have health insurance.

CHACE: Is he going to get it?

KESTENBAUM: He says he doesn't know. I mean, he's one of those young people who, you know, goes to the doctor occasionally for the checkup and they're like you're fine, you're young. So, you know, if you're him paying what could be thousands of dollars a year for maybe one checkup, that's a tough proposition. He says he would like health insurance at some point.

CHACE: So our last piece for you, if you look behind what's going on this week between the health care and debt ceiling, government shutdown and what's really behind this conversation is this kind of philosophical divide about the role of government and how much is the government supposed to do for people. For instance, when it comes to benefits like food stamps, stuff like that, people sometimes say that benefits create a culture of dependence. And others say, no, they're helping people out who have actually run out of options. So NPR's Pam Fessler, she took a look at this debate and brought us this story.

PAM FESSLER, BYLINE: Michael Tanner of the libertarian Cato Institute says for many people it pays not to work.

MICHAEL TANNER: Look, if someone came to me and said I'll pay you everything you're making today but you don't have to work anymore, I'm going to think about that.

FESSLER: Tanner says that those who get welfare - that's everything from food stamps to Medicaid to heating assistance - can get more in 35 states than they would from a minimum-wage job, in some states a lot more. He says even if someone wants to work...

TANNER: Welfare can actually be a rational alternative to work for many people.

KESTENBAUM: Not that they're lazy, he says, they're just making a sound economic choice. Take Rhode Island, a mother with two children who gets seven benefits there, including cash assistance, food stamps, housing and Medicaid, he says she can get aid worth almost $39,000 a year, the average starting salary in the state for a teacher or secretary. So if it's welfare or work...

TANNER: It's going to tip the balance for some people.

BRANDY ALVAREZ: I disagree, and I'm wondering where the rest of my money is (laughter).

FESSLER: That's Brandy Alvarez, one of those welfare recipients Tanner's talking about. I went to Rhode Island to find out what she and others here thought about his findings published in a Cato report. Alvarez of North Providence went on public aid more than a year ago when she and her husband split. She had two children and no job. Alvarez says the assistance she got was nowhere near $39,000.

ALVAREZ: Even the benefits we did receive, which - we didn't receive housing, we didn't receive utility assistance, we received cash and food stamps only - was barely enough.

FESSLER: And critics say that's a problem with Cato's report. It assumes people get lots of benefits when in fact few do. In Rhode Island, only 1 in 4 welfare families receives housing assistance, a third of Cato's $39,000 estimate. It's just not available. People here wait years for public or subsidized housing.

ALVAREZ: Benefits are not easily handed out. You have to jump through hoops, you have to submit all the documents that you've ever had in your life to them to qualify and then certainly you don't always qualify.

FESSLER: And when you do get a job, says Alvarez, your benefits don't all disappear, something Cato fails to mention. When she was offered a $12-an-hour job with a nonprofit, Alvarez knew she'd lose her monthly welfare check and her food stamps would be cut. But she got to keep Medicaid. She says in the end, she's just breaking even. But taking the job was worth it.

ALVAREZ: I knew that that was going to be my stepping stone.

FESSLER: Hopefully to a better job and getting off all public aid. Another factor in her decision - Alvarez's cash benefits were set to expire in two years anyway. In most states, there's a time limit for receiving welfare. I called Michael Tanner back up and told him what Alvarez said. His response, her decision just proved his point.

TANNER: She was, in fact, motivated to get a job to some degree by the paucity of benefits.

FESSLER: Which is why he thinks public aid needs to be cut. But people here say that ignores one other really important thing. There aren't enough jobs.


UNIDENTIFIED MAN: I thought I left the door unlocked.

ROWE: Oh, did you?

FESSLER: Tonilyn Rowe has just arrived at a friend's house in Woonsocket, a small city north of Providence. She's picking up her 6-month-old son. Her friends were watching him while Rowe took a class on money management.

ROWE: He eat his dinner?


UNIDENTIFIED MAN: He ate his dinner and drank his bottle.

ROWE: Mommy don't got you, you got mommy, huh? Yeah, you do.


ROWE: Oh, good one.

FESSLER: Rowe is 25 and single. She stopped working at Dunkin' Donuts when she gave birth and has been on public assistance ever since. Rowe says finding a new job has been hard. Unemployment in Woonsocket is 11.2 percent. Half of downtown is shuttered. Even the Wal-Mart and Lowes stores recently left town.

ROWE: Every day, I go out and push my son around and fill out applications. But, obviously, it's not a good look to walk into a job with a stroller. I mean, they really don't look at that as ideal.

FESSLER: She also doesn't have car, which limits her options. Buses in Woonsocket stop at 7 p.m. Rowe says public assistance isn't that great. She can barely make ends meet. But she does grant Tanner this - the tradeoffs are something she worries about.

ROWE: There's always a thought in the back of my head that if I take a certain job, I'm going to lose my benefits like food or cash. So it's always a thought in the back of my mind of getting a job to - if I'm going to make enough to support me and my son.

FESSLER: Rowe says she'd still rather work. But she and many others here think the answer isn't less public assistance but more, for things like job training and child care, benefits that would make work more doable. And surprisingly, to some extent, Tanner agrees.

TANNER: I think what you need to do is a little bit of both. I think what we want to do is have transition assistance, but we also want to make sure that the level of benefits is not sufficient to be a disincentive.

FESSLER: So it seems the question isn't so much carrots versus sticks but finding the right combination.


CHACE: That's it for us today. Of course, you can let us know what you think - npr.org/money, planetmoney@npr.org. Find us on Facebook and Twitter.

KESTENBAUM: I'm David Kestenbaum.

CHACE: I'm Zoe Chace. Thanks for listening.


M83: (Singing) Driven by big waves of fire. To run and yell all the way, nothing can hurt me today. Transcript provided by NPR, Copyright NPR.