How We Can Keep from Going Broke

Social Security, Medicare, Medicaid and other social insurance programs are bankrupting America. They will produce ever-escalating deficits for as far as the eye can see.

So what can we do about it? All we hear out of Washington are “eat-your-spinach” solutions — both from Democrats and Republicans. These involve cutting benefits, forcing doctors to ration health care, etc. Naturally, the beneficiaries resist such change.

My colleagues and I at the National Center for Policy Analysis have been thinking about a different approach. Reform of entitlement programs should be a win-win proposition. That is, it should be good for the individual who agrees to accept fewer government benefits as well as for the taxpayers.

Does that sound too good to be true?

Here is part of the idea.

Opportunities to Opt Out. People of any age should have the choice to opt out of social insurance in favor of alternatives that better meet their individual and family needs. In particular, they should be able to substitute assets and arrangements they have voluntarily chosen, and that they own and control, for the government systems they are now forced to be part of. In particular:

  • People should be able to substitute private savings, private pensions and annuities, and private insurance for participation in Social Security.
  • They should be able to substitute private insurance and private health savings for participation in Medicare and for participation in the federalized health care system sometimes called ObamaCare.

  • They should be able to substitute private disability insurance for participation in the federal disability program.
  • They should be able to substitute private savings, private pensions and annuities, and private insurance for participation in Medicaid’s long-term care insurance.
  • At their place of work, employees and their employers should be free to choose private unemployment insurance arrangements, private disability insurance and private alternatives to workers’ compensation.

The Conditions for Opting Out. There is only one general condition that must govern these choices: They must not increase the expected burden for other taxpayers. This means (1) there must be a reasonable expectation that the direct tax burden for others will not rise as a result of an individual’s opting out and (2) there must be a reasonable expectation that the individual will not try to return to the government program (thus creating an additional burden for everyone else) if the private option turns out to be disappointing.

Limits on Finding Solutions. In fashioning better solutions, we cannot ignore why these programs were created in the first place. Government does more than offer insurance. It almost always makes the insurance compulsory. Why is that?

There are a great many insurance purchases that are largely ignored by government. These include life insurance, homeowners insurance and automobile collision insurance. Why is government involved in some of these decisions and not others?  There is actually a rational reason based on economics. Most of us are basically indifferent about whether people insure to protect their own assets. We do care about decisions that could create external costs for the rest of us, however.

Through Social Security, we force people to pay for life insurance benefitting dependent children (who could potentially become wards of the state) but not for a working-age spouse. All but three states force people to have auto liability insurance (covering harm to others) but not casualty insurance (covering their own cars). We basically don’t care whether people insure their own homes, but we force them to contribute to retirement and disability schemes to prevent their accidental dependency on all the rest of us.

Here is the principle: government intervenes in those insurance markets where people’s choice to insure or not insure imposes potential costs on others. Because of our basic human generosity, we’re not going to allow people to starve or live in destitution. So when people don’t insure for retirement, disability and so forth, society is going to step in and help where help is needed. Implicitly, we have a social contract that socializes the downside of certain risks. If we allow the upside to be left to individual choice, we will have privatized the gains and socialized the losses. When people don’t bear the social cost of their risk-taking, they will take more risks than they would otherwise.

Another way to think about the problem is in terms of the opportunity to become a “free rider” on other people’s generosity. Consider the person who has no life insurance for dependent children, no disability insurance and no retirement savings program. Because he is not paying premiums or saving for retirement, he can consume all of his income and enjoy a higher standard of living than his cohorts. But if he bets wrong (dies too early, becomes disabled, reaches retirement with no assets), he is counting on everyone else to help him out.

Here’s the upshot:  In fashioning better choices for people, we must at the same time prevent them from becoming free riders on the rest of society if their choices do not turn out as well as planned.

Achieving Minimum Social Objectives. Before considering specific opportunities for win/win reforms, it’s worthwhile reconsidering what the goal of social insurance is. In 1935, very few people had a retirement pension. No one had an Individual Retirement Accounts (IRA) account or any of the other savings vehicles that have subsequently been added to the tax law. Life expectancy fell far short of age 65 anyway. So for the vast majority of people, Social Security was seen not as a replacement for private retirement savings but as something new — an additional source of income for the minority of people who would grow old enough to have to rely on it. Similarly, in 1965, very few workers had an employer promise of health care benefits after retirement or any other kind of post-retirement health care plan.

Today things are different. More than 21 million workers have a defined-benefit pension plan and 46 million are building retirement assets in IRA, 401(k), 403(b) and other defined-contribution accounts. In addition to private employer-sponsored plans, many workers can look forward to a military pension or other government retirement benefits. About 27 million workers have a promise of post-retirement health care benefits from an employer and millions of veterans will have access to VA health care benefits. All of these programs can potentially substitute for promises made under Social Security and Medicare.

Take the 44 million workers who have private pension plans insured by the federal Pension Benefit Guarantee Corporation (PGBC). The assets of these plans are invested in stocks and bonds and other assets. However, should the investments fail to pan out or (a much greater risk) should the employers who sponsor these plans go bankrupt and become unable to keep making the required contributions, the PGBC promises a minimum benefit to the retirees. Could this minimum benefit serve as an acceptable substitute for whatever we hope to accomplish through Social Security? If the answer is yes, then we should consider making a lump sum payment to these workers today in return for their agreement to forgo Social Security benefits in the future. Alternatively, we could consider a permanent reduction in their payroll tax rates.

Could health care coverage from the Veteran’s Health Administration serve as an acceptable substitute for the minimum health insurance we want people to have under Medicare? Would an annuity from a major financial institution or a promise of pension or health care benefits from a state or local government count as acceptable alternatives? Again, if the answer is yes, then we could consider making these workers a financial offer to buy them out of their right to receive some or all of their Social Security and Medicare benefits.

What about private savings? If they are to serve as acceptable substitutes there would probably have to be some assurance that the funds would not be squandered or gambled away. Part of the requirement might be that the funds be held by reputable financial institutions and that they be managed according to prudent investment rules. There would also have to be rules governing the rate of withdrawal during the retirement years and a general prohibition against putting the asset up as collateral for loans or other indebtedness.

How to Make It All Work. Given that there are many private vehicles for achieving the social goals of social insurance, how can we take advantage of them? That is, how is it possible to enact reforms that make everybody better off? This is the subject for Part II.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

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5 replies »

  1. A flat tax on all income is not regressive.

    ALL income?
    What? No deductions?
    No difference from investment income and earned income?
    Boy, that ought to raise a bunch of tax revenue.

    Something tells me one of us doesn’t know what regressive means. And I don’t think it’s I.

  2. A flat tax on all income is not regressive. A flat tax with an income cap over slightly at $100k annually is the most regressive on the planet.

  3. It’s capped, and unearned income is not hit at all. What is Mitt Romney’s payroll tax rate? How many zeros before the decimal point?

  4. Allowing members to opt out would destroy these programs in their current incarnation including SSI.

    I do find it interesting you never see a conservative mention that fact that the current 6.2% SSI payroll tax is the single most regressive tax on the planet. That fact conveniently is omitted from the discussion. Even if the upper income tax brackets are raised, there are ways around that. If the income cap was lifted on the SSI payroll tax, it would be much harder for the wealthy to avoid taking a real hit.

    I also don’t understand why SSI is lumped in with Medicare/Medicaid either by conservatives. SSI is fixable from an actuarial standpoint but it requires compromises that both the left and right currently find unpalatable.

    Uptick in SSI disability claims is a real issue & we should make it easier to allow people to earn more income while still getting some form of assistance if necessary.