Sunday, May 02, 2010

Social insurance is not outdated

I was told by a friend that Rep. Paul Ryan, a rising star in the Republican party and a fiscal hardliner, remarked that social insurance systems, such as Medicare and Social Security, were outdated. Indeed, Mr. Ryan has offered privatized alternatives: replacing Medicare with a voucher system and allowing Social Security beneficiaries to invest up to 1/3 of their account values in IRA-like investment accounts with a government guarantee of minimum value.

The CBO responded that Mr. Ryan's Medicare vouchers would not keep up with the costs of medical price inflation. After several decades, the vouchers would cover only a fraction of the cost of insurance. As to his Social Security reform, the CBO said it would actually be more expensive than the present arrangement.

Social insurance is not outdated. The alternative, private savings, has already been tried and it failed. Before the New Deal, many elders were in poverty. Before Medicare, access to health insurance ceased for most retirees. Social Security and Medicare substantially eased those problems. Both programs could stand to be improved. Medical costs need to be controlled. Social Security's funding shortfall is a secondary but fixable problem. Taxes will have to be raised and benefits might be cut modestly. Additionally, given the expected decline in the number of workers relative to retirees, it is worth considering investing some of the trust funds in a pension fund arrangement, much as the Canada Pension Plan now does.

Medical and long-term care costs vary a great deal from person to person. If we relied on savings, many people would be bankrupted and a minority would over-save. In addition, socioeconomic disparities in impoverishment and access to care would be reminiscent of countries in the Global South. If we relied solely on savings for retirement security, the same thing would happen - instead, Social Security makes benefits for lower-income people more generous per dollar of tax they pay than for higher-income beneficiaries (i.e. richer folks cross-subsidize poorer folks). In addition, Social Security allows us to pool mortality risk over the entire country, meaning that we can guarantee everybody a stream of income that lasts until they die, plus survivor benefits for spouses and dependent children, plus disability insurance.

Ryan's reliance on a savings system would do none of that. It is his proposal that is foolish and obsolete, not social insurance.

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