LTC Bullet:
Goodman on Better Risk Management Friday,
September 23, 2016 Seattle— LTC Comment: We invite your consideration of an exceptional paper by health policy guru John C. Goodman after the ***news.*** *** FREE TICKETS to the Insurance Agent
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BULLET: GOODMAN ON BETTER
RISK MANAGEMENT LTC
Comment: Having come to
understand what’s wrong with long-term care public policy in the late
1980s, I decided I needed to have a better grasp of acute health care
policy. I read John C.
Goodman and Gerald L. Musgrave’s seminal Patient
Power(Cato Institute,
1992) and was totally blown away. The
book is clear, comprehensive, and convincing.
What surprised and pleased me about its analysis was that health
policy generally as explained in the book and LTC policy specifically as
I’d come to understand it fit together perfectly.
Government is the source of dysfunctions in both and solutions in
both depend on bringing consumers back into the market while phasing
government interference out. So
I’ve followed Goodman’s work at the National Center for Policy
Analysis and more recently at The
Goodman Institute for Public Policy Research
with great interest. He’s
best known as the “Father of Health Savings Accounts,” but I’m
pleased to see he’s branching out into much broader public policy
analysis. I want to focus
your attention today on a new paper he presented recently to the Mont
Pelerin Society (MPS).
The MPS was founded by Milton Friedman, Friedrich Hayek and other
classical liberals and counts among its members more than a half dozen
Nobel Prize recipients. Goodman
says My
paper . . . presents a new way of approaching public policy reform -
especially reform of entitlement programs. It draws on work by Kotlikoff,
Saving and other scholars we are working with. My book on this subject
will be published by the Independent Institute later this year. Find
his paper, titled “Better Than Government: New
Ways of Managing Life’s Risks,”here.
What follows are excerpts I’ve selected to convey the gist.
We’ll let you know when the book becomes available. ------------------ Excerpts
from John C. Goodman’s “Better
Than Government: New Ways of Managing Life’s Risks” This
paper is based on three ideas. The
first idea is the win/win policy change. A
typical government program is funded by taxpayers and provides goods,
services or money to a group of beneficiaries. Imagine that you could make
a change in that program that reduces the cost to the taxpayers and
enhances the value of the program for the beneficiaries – at the same
time. Who could possibly object to that? I
think there are thousands of opportunities to make win/win policy changes
in the US political system. Win/win policy changes ought to be
irresistible to politicians – whether Republican or Democrat,
conservative or progressive, independent or socialist. After all, win/win
means that everyone comes out ahead. There are no losers. What could be
more popular? And
yet win/win is just about the last thing our representatives seem disposed
to talk about. It’s almost as if members of Congress think they were
sent there to do battle. If they don’t draw blood, if someone doesn’t
suffer as a result of their efforts, they apparently think they aren’t
doing their job. Perhaps for that reason, Washington is dominated by a
zero-sum mentality: everyone’s gain must be offset by someone else’s
loss.. . . The
second idea is what I call the trial and error principle.
. . . Whenever two policy extremes exist such that one kind of cost
falls and another rises as we move back and forth between them, there is
almost always some intermediate point where everyone gains. We can’t
find that point by armchair theorizing, however. We must be willing to
experiment and adapt. That is, we must be willing to do the kind of
experimentation that private markets do every day. Why
do I think there are thousands of opportunities for win/win public policy
changes? Because so many government programs are so visibly inefficient.
They labor under archaic rules and regulations . . . -- obstacles that any
private entrepreneur would jettison in a second. Further, they inevitably
leave all of us with perverse incentives. When we act on those incentives
we do things that make social costs higher and social benefits lower than
otherwise. Economists
define inefficiency as a state of affairs in which everyone could
potentially be better off by doing things differently. If government
programs are inefficient, we know that in principle everyone could be
better off through some sort of policy change. Here
is the third idea: win/win strategies can be used to solve our most
difficult public policy problems – problems created by social insurance. Many
people incorrectly assume that the reason for the growth of government in
the twentieth century, both here and abroad, was the need to take care of
the poor and the unfortunate. Even the term “welfare state” suggests
that way of thinking. But modern governments in developed countries are
not principally focused on welfare for the poor. They are focused on
benefits for the middle class. More
than one commentator has loosely characterized our federal government as
an insurance All developed
countries in the world today face a common problem: they have promised
more than they can deliver. People are expecting benefits for which
taxpayers are unlikely to be willing or able to pay, once the needed tax
increases become evident. In addition, the benefits that government
provides are all too often delivered inefficiently, impersonally,
inflexibly, and in a way that encourages perverse behavior on the part of
the beneficiaries. . .
. There
are certain risks that human beings always have faced. These include: •
The risk of growing too old and outliving one’s assets. In
the United States, the federal government provides an income, pays medical
bills, and covers a large part of the cost of long-term care for people
during their retirement years. For people of working age, the federal
government is subsidizing health insurance and insuring against disability
and unemployment. State governments are also involved — insuring workers
for injury, death, and disability on the job. Although many of these
programs include the word “insurance” in their names, they are very
different from traditional indemnity insurance. In many respects, they are
not insurance at all, but merely thinly disguised vehicles for
redistributing income. These programs have
been insulated from private-sector competition. People who find a better
way of insuring on-the-job injuries or health or disability expenses or
providing for retirement income are normally not able to take advantage of
that knowledge. For the most part, we are all forced to participate in
monopoly insurance schemes, regardless of potentially better alternatives.
Even where competition is allowed (as in health insurance) it is regulated
so tightly that no one ever sees a real premium for any health plan.
Government insurance and government-regulated insurance are also subject
to special interest political pressures that undermine its rational
provision. . . . [I]n
the United States and in most other countries around the world social
insurance schemes •
Social Security’s early retirement program and its survivorship benefits
discourage work by imposing an implicit marginal tax rate of 50 percent
— on top of all the other taxes workers face. Because
of the temptation to spend payroll tax revenues that are not needed to pay
social insurance benefits on other politically popular programs, social
insurance is almost always operated on a pay-as-you-go basis. This has
resulted in huge unfunded liabilities both in this country and abroad.
These unfunded promises have created enormous implicit liabilities for
governments around the world. According to a Social Security trustees
report, the unfunded liability in Social Security and Medicare is $107
trillion, or more than six-and-a-half times the size of the entire U.S.
economy. If the implicit, unfunded promises in Medicaid, Obamacare and
other programs are included, the government’s total implicit debt is
almost twice that figure. . .
. Here
is the principle behind social insurance, then: government intervenes in
those insurance markets where people’s choices to insure or not insure
impose potential costs on others. Because of basic human generosity,
society is 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, a behavioral response known as “moral hazard.”
. . . Here is 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.
. . . If individuals can
find better ways of protecting themselves against life’s risks, they
should be allowed to take advantage of those discoveries. If they are
willing to take responsibility for their own needs and relieve others of
that burden, they should be encouraged to do so. Wherever possible, the
goal should be to maximize choices and opportunities for individuals,
leaving to government the minimum role of ensuring that the needs of the
most vulnerable continue to be met.
. . . If
we do nothing to reform our nation’s entitlement programs, we will
eventually be forced to adopt harsh policies. High-income individuals will
be cut off, of course. They will not receive any Social Security checks.
Or if they do get them, the government will take the money back through
higher taxes. Instead of getting subsidized Medicare, they will be forced
to pay the full (unsubsidized) premium — and then some. Yet these
changes will amount to no more than a drop in the bucket for Uncle Sam.
Before it’s over, most people will find that they are getting less than
what was originally promised. In fact, it’s likely that everyone will face higher
taxes, smaller benefits, or both. Such a zero-sum outcome is one in which
everybody loses. And because everyone will lose, these reforms will be
difficult and painful to enact. They will be resisted by everyone. Is
there an alternative? . . . In what follows, I
propose a simple idea. People of any age should have the opportunity 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 in which they are now
forced to be participate. .
. . There is only one
general condition that must govern these choices: They must not increase
the expected burden for other taxpayers. This means that there must be (1)
a reasonable expectation that the direct tax burden for others will not
rise as a result of an individual’s opting out and (2) 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. This condition implies that
opting out must be a win/win proposition.
. . . Despite this almost
self-evident fact, most proposals to change our social insurance programs
– proposals coming from both political parties – are zero sum. For
every gain they promise, someone else must bear a loss. For example, some
Democrats are proposing more generous Social Security benefits. But those
benefits would be paid for by imposing new burdens on the young, either in
the form of higher payroll taxes or a larger public debt. Some Republicans
are proposing to solve future deficit problems by reducing future benefits
– a burden for the young without any corresponding gain.
. . . There
is a more general principle here: Any time anyone — rich or poor — can
find a way to solve the social problems Social Security and Medicare were
designed to address and leave the taxpayers with a smaller burden in the
process, we should welcome the change.
. . . We
don’t want the elderly to live out their remaining years of life in
extreme poverty. Most of us don’t care very much, however, if seniors
fail to live out their remaining years in luxury. That is important to
remember because Social Security benefit payments are actually highly
regressive. . . . What
about private savings? If private savings are to serve as acceptable
substitutes for benefits 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. Texas A&M
University economists Thomas Saving, Andrew Rettenmaier and Liqun Liu have
produced a first-of-its kind calculation of the value of Social Security
to young people in light of the political uncertainty about its future.
They conclude that a 21-year-old earning an average wage with a moderate
degree of risk averseness would be better off if he could completely opt
out of the system by paying a 4.5 percent payroll tax for the remainder of
his work life. That means he would forgo all future Social Security
benefits and avoid all future Social Security taxes, including the current
12.4 percent tax he and his employer are now paying.
. . . Think
back to the mid-twentieth century when many social security systems were
devised in countries around the world. What rational person would choose a
system that makes promises to pay young people benefits five or six
decades into the future without making any provision to save and invest
the funds needed to pay those benefits? What rational person would devise
a system that encourages young people to believe they will get benefits
five or six decades into the future, knowing all along that the payment of
benefits depends on future taxpayers -- but without knowing what the
fertility rate will look like a half century later and therefore without
knowing how many future taxpayers there will be? In short, what rational
person would devise an entire retirement system, using the same techniques
that Bernie Madoff used to scam his investors? ---------------- LTC Comment: That’s enough to give you the flavor of this paper. I hope this inspires you to read it in fullhere and to await eagerly, as I will, the book-length treatment of these ideas. |