Tag: social security reform

Personal Accounts—for Medicare

Last night, Newt Gingrich praised the Chilean Social Security system, which allows workers to save for their retirements in personal accounts, rather than contribute to the government pension scheme. Several of my Cato colleagues are far more qualified than I am to comment on that system, including Mike Tanner, Jagadeesh Gokhale, and Jose Pinera–who designed and implemented it. But personal accounts are as important for reforming compulsory health insurance schemes like Medicare as they are for reforming compulsory pension schemes.

In 2010, I traveled to Chile to deliver an address to the International Federation of Pension Fund Administrators (FIAP).  I detailed the harms caused by compulsory health insurance schemes and explained how personal medical accounts would improve health care and generate wealth even for the poor:

In designing health care markets, perfection is not an option. Under any system, whether state-run or the free market, some patients will inevitably fall through the cracks.

Personal medical accounts can help fill in those cracks by enabling innovations that improve medical care and bring it within reach of the poor. Yes, some will not earn enough to provide for themselves. And when we are free to make our own decisions, a small number of people will make poor decisions. I believe we have a moral duty to care for patients who could not or would not provide for themselves. Personal medical accounts will make it easier for us to meet that moral duty.

Under compulsory health insurance schemes, those cracks widen, and more people fall through. Price and exchange controls block innovation. Governments waste resources on low-value medical care. Some would describe these as the unavoidable costs of creating an equitable society. But those wasted resources do not purchase solidarity. They purchase sickness and poverty.

FIAP turned my address into this book chapter, which also explains how to craft a system of personal medical accounts.

For current enrollees, who have not built up savings in a personal medical account, Congress should make Medicare look more like Social Security. That is, the government should subsidize Medicare enrollees by giving them cash, rather than creating a complex health-insurance scheme that effectively lets government officials shape the entire health care sector.

The Case for Social Security Personal Accounts

There are two crises facing Social Security. First the program has a gigantic unfunded liability, largely caused by demographics. Second, the program is a very bad deal for younger workers, making them pay record amounts of tax in exchange for comparatively meager benefits. This video explains how personal accounts can solve both problems, and also notes that nations as varied as Australia, Chile, Sweden, and Hong Kong have implemented this pro-growth reform.

Social Security reform received a good bit of attention in the past two decades. President Clinton openly flirted with the idea, and President Bush explicitly endorsed the concept. But it has faded from the public square in recent years. But this may be about to change. Personal accounts are part of Congressman Paul Ryan’s Roadmap proposal, and recent polls show continued strong support for letting younger workers shift some of their payroll taxes to individual accounts.

Equally important, the American people understand that Social Security’s finances are unsustainable. They may not know specific numbers, but they know politicians have created a house of cards, which is why jokes about the system are so easily understandable.

President Obama thinks the answer is higher taxes, which is hardly a surprise. But making people pay more is hardly an attractive option, unless you’re the type of person who thinks it’s okay to give people a hamburger and charge them for a steak.

Other nations have figured out the right approach. Australia began to implement personal accounts back in the mid-1980s, and the results have been remarkable. The government’s finances are stronger. National saving has increased. But most important, people now can look forward to a safer and more secure retirement. Another great example is Chile, which set up personal accounts in the early 1980s. This interview with Jose Pinera, who designed the Chilean system, is a great summary of why personal accounts are necessary. All told, about 30 nations around the world have set up some form of personal accounts. Even Sweden, which the left usually wants to mimic, has partially privatized its Social Security system.

It also should be noted that personal accounts would be good for growth and competitiveness. Reforming a tax-and-transfer entitlement scheme into a system of private savings will boost jobs by lowering the marginal tax rate on work. Personal accounts also will boost private savings. And Social Security reform will reduce the long-run burden of government spending, something that is desperately needed if we want to avoid the kind of fiscal crisis that is afflicting European welfare states such as Greece.

Last but not least, it is important to understand that personal retirement accounts are not a free lunch. Social Security is a pay-as-you-go system, so if we let younger workers shift their payroll taxes to individual accounts, that means the money won’t be there to pay benefits to current retirees. Fulfilling the government’s promise to those retirees, as well as to older workers who wouldn’t have time to benefit from the new system, will require a lot of money over the next couple of decades, probably more than $5 trillion.

That’s a shocking number, but it’s important to remember that it would be even more expensive to bail out the current system. As I explain at the conclusion of the video, we’re in a deep hole, but it will be easier to climb out if we implement real reform.

Weekend Links

  • The G.O.P.’s next move on health care: “The challenge for Republicans is not to try to ‘do’ things just like the Democrats but a little less expensively or with a little less bureaucracy, but to present an agenda of personal and economic liberty as a positive alternative… [Republicans] will have to show that this time they are in favor of something positive. It’s called freedom.”

Social Security Is Running a Surplus…Oops

For years, opponents of Social Security reform have told us that there is no need to rush into changing the program because, after all, Social Security is running a surplus today. Well, according to a new report by the Congressional Budget Office, not so much.

CBO reports that the Social Security surplus, originally expected to be $80-90 billion this year and next will shrink to $16 billion this year and just $3 billion next year (essentially a rounding error) as a result of the recession and rising unemployment. And those estimates may be far too optimistic. In February of this year, for example, Social Security actually ran a deficit—spending more than it took in through taxes and interest combined.

And, while CBO expects a return to modest surpluses after 2010, as the recession ends and unemployment falls, that is betting on the success of the unproven Obama economic program. If unemployment stays at current levels, Social Security will begin running permanent cash flow deficits in 2011 (eight years earlier than previously predicted).

Opponents of personal accounts have pointed out recent declines in the stock market as a reason why private investment should no longer be considered an option for Social Security reform. The evidence suggests that, even with recent market declines, private investment would still produce higher returns than Social Security. The new surplus numbers provide yet another lesson: if the economy is in such a mess that it hurts private investment, traditional Social Security isn’t going to be in any better shape.

The case for personal accounts remains as strong as ever.

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