ECONOMIC SECURITY

Do you hope that you can deal satisfactorily with life’s financial insecurities? You might have to be very lucky or very wealthy to be able to do so on your own. Yet there are ways that everyone’s financial insecurities can be met well. How well we are doing in that regard in this country, and how much better we could make the future in that regard is the subject of this essay.

The vicissitudes of life itself create insecurity for everyone. Anyone may die too soon without being able to provide financial security for their family, or they may live too long and not be able to provide for themselves. Anyone may suddenly face medical bills that they simply cannot handle, or they may be disabled and not be able to earn at all, or as much as before. Or anyone may face legal liabilities they cannot meet. They may have an accident or their house may burn down.

By its very nature, no one’s position in a market economy is ever secure in the face of changes in market demand, resources and technology that go on all the time. Many people are able to adapt to these changes, at least over some time, but others are not able to do so on their own. In modern industrial economies we are not dependent only on our own efforts for our economic livelihoods--we are dependent parts of a vast interdependent economic system which creates insecurities beyond those inevitable in any life. We may lose our job temporarily because of a recession or depression, and that may go on for months or even for years. Or new technology may destroy our job, as may increased competition from imports. Changes in market demand may ruin the market for the product we make and the firm that hires us may go out of business. If we can’t find another job quickly, we can find ourselves in very bad circumstances.

But it is also true that this interdependent economic system is capable of dealing more effectively with all of life’s insecurities than we could ever do as independent individuals, or even as members of small rural communities.

One answer to economic insecurity is to save for the “rainy day”.

Very good idea. But the simple fact of the matter is that no one except the very wealthy can possibly save enough to take care of even one of the above mentioned disasters, let alone more than one, if it is a serious disaster, or if it occurs early in one’s earning career.

The very idea of politicians now telling us, as some are, just to save is ridiculous--even dishonest, for any thought about the problem should suffice for anyone to know that saving as protection against financial disasters is not enough of an answer unless one is wealthy. Even national policies to promote saving are essentially fraudulent as an answer to the problem. Everyone should save to supplement, not to substitute for, whatever other provision can be made to deal with personal or family economic disaster.

Of course people should save, for a whole variety of reasons. If they want to take a vacation, people should save for it in advance. If parents want their children to have a college education, they should start saving as soon as possible after the child is born. The fact that many people do not save enough even for planned expenditures is not too surprising when one considers the way we are deluged with credit cards. Business does everything it can to get us to borrow and spend, and sometimes profits more on the credit provided than on the goods sold to us on credit.

But if we are already in debt whenever we need more money for whatever reason, we are in real trouble. Whatever provisions can be made for whenever disaster strikes, it is always true that having some savings as a supplement can help out, though only the wealthy can rely on it entirely.

In olden days, when a farmer’s barn was hit by lightning and burned down, all the neighboring farmers pitched in and helped rebuild the barn. Each knew that if they in turn had bad luck, others would pitch in and help them. In modern urban society, economic disasters hit many people, but they are relatively few out of the total population. There is good actuarial data on how many get hit by each type of disaster. But nobody knows which individuals or families will be hit and will need the help of others.

The solution is to organize somewhat like a farm community, except that each person pitches in and helps by contributing a few hours pay each year. Each pays a small premium to an insurance company which holds the bag of money, earns something by lending part of it, and pays out an agreed sum to the few who get hit by disaster.

Individuals cannot know their own probability of a disaster requiring help. But they can can join others they do not even know personally, contribute to a pool of funds out of which anyone of them can be reimbursed if disaster befalls them. By having a large number of participants, an insurance company can know the probability of losses and set their premiums accordingly. Insurance is an absolutely wonderful social invention to protect individuals and deal with insecurity in an interdependent society.

Economic disaster can hit anyone too hard for any except the very wealthy to handle it by themselves. For many years, people hit hard by financial disasters were left at the mercy of private charities or to their fate in public poor houses. These were very poor answers to their problems.

So insurance came to the rescue. It can be offered to cover all insurable economic risks for people whose incomes are adequate to buy the insurance. For private insurance firms, any risk is insurable if there is data available on the number of persons who on the average have any one type of disaster in the population, & data on the average magnitudes of the different types of disasters.

So people with enough income to do so can purchase life insurance, disability insurance, house and property insurance, liability insurance, car and accident insurance. Some medical insurance is available, but not to everybody. It is something of a special case, so it will require further discussion.
The insurance industry gives us ample ground for hope that we can meet disastrous expenses (beyond what we could afford or even save enough for) if we can afford to buy insurance against the possible disasters.

You can indeed hope that you never have a disaster that you bought insurance against, for insurance protects you against only the financial aspects of a disaster, not against its other aspects, as nothing can do that.



PROTECTION OF INSURANCE COMPANIES

Of course there is a problem if an insurance company does not keep enough reserve to meet the disasters for which it may have to compensate its policyholders. Indeed if it goes belly-up after people have paid in insurance for many years and then they have to rely on it to reimburse them after some disaster, there is tragedy. So the question is whether insurance companies are sufficiently regulated to avoid such tragedies and keep the insurance funds safe. Some have not been, so better regulation is needed.

We have not even begun to think about how to extend enough protection to our private insurance system so that people will not be in danger of losing insurance protection for which they had paid over the years. Some insurance companies that had long had good reputations were able to continue putting out nice financial reports to maintain their public reputations, while in fact they took huge risks by loading up with junk bonds and later were insolvent.

Private company reinsurance pools are some protection. No one wants a highly intrusive type of government inspectors and regulators, so perhaps requirements could be put only on the reinsurance system if all insurance companies had to reinsure.

Another problem is that an insurance company licensed in one state is not licensed in all states, so when an aged person moves to another state and later tries to collect on an insurance claim, the insurance company may not honor the claim. That could be solved by requiring that good federal registration standards be met by all insurance companies.

Indeed private insurance companies have often sold policies that in fine print, that policyholders often do not read or do not understand, take away much of the protection that buyers think they have bought. Has regulation gone far enough to protect buyers of insurance so that they know exactly what protection they have bought, and so are not exploited by the insurance companies? No.

The recent worship of deregulation is very ill advised. Public support of it can only be regarded as irrationality. There are many instances where regulation in the public interest needs to be improved instead of reduced or eliminated. What is the probability that the public will be protected by better regulation of insurance companies in the future? Or will we be less protected as business preaches deregulation? The slogan “Get government off our backs” really means get government regulations off the backs of all businesses.

If you want to be sure that your hope that the provision you make for your economic insecurity is well grounded, get political enough to align yourself with others and work for government regulation of and protection of insurance companies. I was not the only one who almost got burned by insufficient regulation of insurance companies.



SOCIAL INSURANCE

There are some disasters for which there is not good actuarial data on which to base premiums. Unemployment insurance is a case in point. No one can safely calculate how much unemployment will hit the economy, when it will hit, how serious it will be and how long various amounts of unemployment will last. An insurance company has no reliable way to set premiums for unemployment insurance. In addition no one really knows whether he or she will be among the unemployed when it increases, so one does not know how much one should pay to carry unemployment insurance protection. Under those circumstances very few people would buy it unless it was very inexpensive, and few insurance companies could afford to sell it at a price many people would pay.

Social insurance instead of private insurance companies is the simple answer. Government can require everyone to pay something to be insured, and levy a tax on each business to provide unemployment insurance. If the costs are higher than expected, other tax funds can be used to meet the added costs. Social insurance where private insurance does not work at all, or does not meet the need well, can be very good social policy and very good individual protection.

But our unemployment insurance system needs some improving. It should be designed to handle the unemployment due to the down swings of the business cycle. We even vary unemployment insurance premiums for firms on the basis of their unemployment experience, as though the amount of unemployment a business suffers is something over which they had substantial control. But anyone must know that some types of business are hit much harder by each cyclical downswing than are other types of business. That is entirely out of their control. One could of course argue that their unemployment is just a higher cost of that type of business that they (or only their customers) should bear, rather than that most unemployment is a cost of recessions and depressions that the whole community should bear. One way for the whole community to bear the cost of unemployment caused by the business cycle is by a tax on all business that of course they usually will pass on to all consumers.

Even a rather poor social insurance system for unemployment gives you ground for hope that you are less likely to suffer as much income loss from unemployment as you otherwise might. If a recession throws you out of work, or if you lose your job for some other reason or for no reason at all, while you look for other work in the latter cases, you have something to fall back to a limited extent and for a while.


SOCIAL SECURITY AS SOCIAL INSURANCE

Our entire Social Security System is a form of social insurance. Along with other welfare state legislation it is referred to as the social safety net. The general philosophy of a social safety net is to protect anyone in case they fall, through no fault of their own, below a subsistence income level.1 Indeed social insurance can be set up to protect everyone against any extremely large accidental and unexpected drop in their standard of living, whether or not that would reduce them below a subsistence level. Our Social Security System is most people’s (not everyone is covered by it) first line of defense against a number of very significant sources of economic insecurity. It is very important for everyone covered, but not alone enough protection against financial disasters. Indeed, this country has a sort of patchwork quilt social safety net with some big holes in it, most notably with respect to medical insurance.

It is financed by an employee and employer tax on employee income up to about $70,000, and it provides benefits roughly proportional to taxed employee income. Without going into detail, benefits are payable when one retires or if one is disabled before retirement, and payments are made to one’s survivors at death (to minor children and then to an aged spouse). Some hospitalization payments are also available under Medicare. The system is not intended to meet all financial needs in these various instances, but does provide substantial help in meeting the needs.

The important thing to note is that the Social Security payments for disability continue as long as one is disabled, for life if necessary, the retirement payment continue until one dies, and the payments to a surviving spouse continue as long as they live. That needs to be emphasized: These social insurance payments can continue for as long as the beneficiary lives.

That is the beauty of insurance as against saving as a way of dealing with these financial problems. One cannot exhaust the payments, as one can exhaust one’s savings. Of course, saving is desirable to supplement the insurance payments, and one can only hope that the saving that supplements the insurance payments are not exhausted too soon, as they certainly would be for all but the rich if there were no Social security insurance.

It is absurd to think that that private savings could replace social insurance and substitute for it instead of merely supplementing it. Any suggestion that a savings system can replace an insurance system is simply dishonest. No personal saving system, however much aided by tax credits for those too poor to save much, would be able to guarantee to help as long as each person in need lives.

Many people indeed do not now rely upon Social Security alone to take care of their possible disability but buy disability insurance, which is a very wise thing to do. If they are sensible, they also save to supplement both in case they become disabled. Few people will be disabled, but no one know whether they will be among them, so supplementing Social Security with private disability insurance plus personal saving instead of relying any one of them alone is very smart. Indeed, not to do so would in my judgment deserve the term stupid.

And most people, if they are not so poor they cannot afford it, buy private life insurance policies for exactly the same reason. to supplement Social Security when one dies. No one knows when they will die naturally or meet an accidental death. There is no way they can know that they have time enough to save all that their survivors would need in addition to Social Security, even if they are currently earning relatively high incomes.

We still do have to adjust our Social Security properly so that it remains financially strong, though there are a number of ways that this could be done. But the idea of simply returning the problem to individuals to protect themselves as best they can by saving, ignores most people’s inability to save enough and others’ improvidence. It ignores also the fact that we are all one nation, a nation of people whose normal compassion requires us to help people in need, and the fact that the best way to do that is not by emergency appeals for single persons in distress but by social insurance provision for all such persons. It has thus far in its history done a great deal to keep to keep many of the aged from falling into poverty in their helpless years. Yet may people today, especially many politicians, are ignoring the real success of the system. That is well described in John E. Schwarz’s book, AMERICA’S HIDDEN SUCCESS.2

Contributions to the Social Security Trust Fund were used by the Federal government for years to reduce the reported budget deficit. But as it is, the current surpluses in the Social Security system will later disappear, and the Trust Fund will have to be drawn upon since the annual contributions will be less than the amounts the Trust Fund will be paying out annually. There is discussion going on as to what changes should be made to keep contributions and claims equal. Since people are now living longer than when Social Security was established in the 1930s, the age at which people can start withdrawing this part of their retirement income will be increased some. Other changes may be made in the entitlements or in the contributions to keep Social Security paying in full what it is obligated to pay to those who contributed. Some people whose wages barely put them in the lower middle class pay the full Social Security contribution (tax) rate on their wages, but the rich pay no Social Security taxes on the income they receive over $80,400 a year. If they were taxed on all their income we would not be talking about an immanent Social Security financial problem at all. Or, if the federal government paid back into the Social Security coffers the money it took from them, plus the interest on those borrowings (in all the years when Social Security was running a surplus), in order for the federal government to finance other expenditures so that the federal deficit would not be so big, There would no warrant for talking about Social Security running out of money. We would be talking about the taxes necessary to repay funds owed to Social Security borrowed earlier to reduce earlier deficits.

Even if no changes are made, however, the system will not collapse as one might gather from politicians. Current estimates are that it would likely be able to pay about 70% of the amounts it is now obligated to pay. And those estimates are based upon assumption that the rate of growth of the nation’s income over the years falls back to earlier levels rather than remaining at recent levels. It is probably safer to guess that the rate may slow down at least a little. But the success predicted for some of the Social Security “fixes” proposed by some politicians depends upon the maintenance of present higher rates of economic growth for the nation. Obviously if comparisons are to be made between no fix and any proposed fix, the same rates of economic growth need to be used in both cases. The duplicity of some politicians in this regard is not generally known, and it does them no credit whatsoever.

The public is right to insist upon maintaining the Social Security system largely as it is, rather than turning any substantial part of contributions back to us to substitute saving for its social insurance features. That is weakening Social Security while pretending to be reforming it. In the last presidential campaign, those proposing to divert some Social Security contributions, in order to invest them in the stock market instead, were never forced to face the reality that that could not be done while also maintaining the benefits owed to present beneficiaries. Nor did they talk about how much Social Security benefit payments would have to be reduced for those putting some of their contributions into outside investment accounts. They never admitted that their proposals might be as much as a trillion dollars short of what they needed to carry them out. Reform indeed!!

But politicians are great at playing further upon public ignorance and especially, at the moment, on public overoptimism about how much better they might do in the stock market. If one is lucky enough to pick the right individual stocks or mutual funds, one might make a lot of money if those security prices rise substantially. But one can lose a lot if one guesses wrong in investing in the stock market. Many have lost even in recent years. But if one does no better than average in the market, and most of us can not count on doing better even if we hire (at some cost) experts to guess for us, the fact is that investing when the market is relatively high will not in general enable one to do better in the market than in government securities. The market has to keep rising to give the average security investors capital gains and not capital losses when it is necessary for them to cash out during retirement years or whenever they need the cash that, if not put into securities, would have added to Social Security benefits. There is the question as to whether the risk of capital loss on the securities is worth it to have a chance that the securities bought will be worth more than was paid for them. If they were bought in a bear market, the chances would be fairly good, but if bought in a bull market, the chances might be very poor indeed.

Even if one forgets the risks involved in stock market investments, the dividend return on investment, when the market is high, is less than on perfectly safe U.S. treasury securities. Treasury security interest rates vary too, but a five year Treasury Note often earns about 4%, and are without risk if one holds them until maturity. Now price-earnings ratios in the stock market are at unusually high levels, so that even if all business earnings were paid out as dividends, which they seldom are, a stock market investor will in general, not get as high a return in dividend payments as one can sometimes get in interest on Treasury securities Some evidently good security investments were paying dividends that amounted to only 2% return on the price paid for them when Treasury 5 year Notes paid 4%.

When there is a recession, some Treasury securities will earn much less, but stock may pay less then also. Taking recession into account as when one might have to get cash for retirement some of what had been invested, a capital loss on stock market investments is most likely, A subsequent paragraph will explain that money previously invested in Treasuries is more likely to yield a capital gain if it has to be sold in a recession to provide retirement funds.

Of course, what everyone claiming big returns in the stock market is counting on is that dividends will be supplemented by capital gains. That is a realistic expectation only as long as the market keeps going up. That the historical trend is a rising market is proof to many people that such a trend must continue indefinitely, however high the Dow goes. That is simply unrealistic. The market will not keep going up forever from its recent high levels.

In addition, one can realize capital gains only if one sells one’s stock, and once the capital gain is taken, if one invests again at the high price, one is again counting upon a continued rise to make another gain. If the market drops and one invests one’s capital gain then, one might more reasonably expect a rise again, unless the market continues to drop, and one needs the money before it rises past the level at which you reinvested. But if you bought stocks or mutual funds when the market was high, and the market is low when you need to sell what you bought, you will take a capital loss. It could be a disaster for you in your old age.

Letting government itself invest in the stock market is the worst idea yet, for that is wide open to corruption. All this discussion of the stock market should be unnecessary, but it will not be if the public lets the politicians get away with putting any substantial amount of what are now Social Security taxes into the stock market one way or another.

So wise up, get political, join whatever groups or party promises not to put into the stock market any taxes now financing Social Security. You will then have better grounds for hope that the insurance features of Social Security will better protect you than if some Social Security funds are diverted elsewhere.
If in addition to paying the full Social Security tax to Social Security, you invest some of your personal savings in Treasury securities, you need pay attention to only one thing. Make sure you know how soon, at the earliest, you might need to sell them to get your money back, and make certain that the Treasury securities mature and will be paid off before that date. Because if market interest rates rise after you buy the securities and remain higher than they were when you bought them, you will take a capital loss on those securities if they have to be sold before they mature. When they mature, they are paid in full at face value whether market interest rates have gone up or down. if you invested in long Treasury securities when interest rates were high, and you have to sell them before they mature, you would receive a capital gain if interest rates fell after you bought the Treasuries. In any case your interest payments on Treasury securities are made regularly and in full. And no state income tax is payable in
Minnesota on interest earned on Treasury securities.



THE ENTITLEMENTS SCARE

A few years ago politicians tried to scare people into thinking that the federal deficit problem was driven entirely by what they call “entitlements”, so they argued that entitlements must be cut back drastically or the deficit problem will cause disaster. Not politicians, but even some military experts say that well over $100 billion could be cut out of the military budget following the Soviet and Warsaw Pact collapse without endangering national security. And even in the future, most opposition to terrorism cannot involve big military operations invading nations.

So the whole trouble cannot be assigned to entitlements, but let us examine the growth of entitlements. The discussion must begin by distinguishing between what are called “means-tested” entitlement programs (sometimes identified as “welfare” spending programs, that used to be about 1/4 of all entitlement spending) and programs which spend what people are entitled to receive because of their prior contributions (for Social Security and Medicare which constitute 3/4 of these non-means tested programs). Politicians usually do not make the distinction clear. Attacking means-tested welfare spending is jumping on people when they are down. Included are primarily AFDC (support for poor families, usually single mothers, with dependent children), food stamps, SSI (the Supplemental Security Income part of Social Security), and Medicaid (medical treatments for the indigent--the latter is about half of total means-tested spending). Of all entitlement spending, only Medicare and Medicaid were growing substantially throughout the 1990s as a per centage of GDP. Ending AFDC “as we have known it” is, with some additional spending, helping many AFDC recipients get jobs in the now strong job market. However many can get only low paying jobs, and they lose medical benefits, so they remain in poverty and when they need medical attention have to cycle back onto AFDC rolls. We should work out something better than the present “reform” to deal with the problem adequately in the near future. There will be trouble when there is recession and even poor jobs cannot take people off the welfare rolls and will indeed put many back on the rolls. The five year and stay off notion will produce only disaster in a recession.

Medicare needs some attention, although it is not clear what the best fix should be. The elderly have benefited greatly by the medical care that many of them would otherwise have been unable to afford at all. Medicare is not socialized medicine but an insurance system that pays private doctors and HMOs and hospitals for care and that pays private business firms for medical supplies. The medical profession has been greatly aided by Medicare, some doctors even abusing the system to collect over a million dollars a year from it. Some business firms have also cheated the government atrociously on medical equipment & supplies. It seems to multiply red tape to try to eliminate the abuse.

However, it should be noted that the administrative expenses of the government Medicare system have been far below those of the private health insurance industry. It will be interesting to see whether the most efficient health system in the country is savaged by the politicians in the process of “fixing” it, or is protected and strengthened instead.

The whole rationale of social insurance is not well understood in this country, although in Europe it has been applied better.



RETIREMENT PENSIONS: INEQUITABLE & UNRELIABLE

Some businesses that appear now to be strong enough to provide pensions often do so, especially if they have strong enough labor unions to bargain for pensions for employees after a certain number of years of service as an employee. Even some private organizations have tried to offer pension plans covering their employees. Most business and private pension systems are now defined contribution plans instead of defined benefit plans. That is, the firm pays as pensions only what was contributed to the pension fund for each employee, instead of insuring that the employee would receive a certain percentage of his regular pay after retirement. Now that people are living much longer than before, the burden of paying people after they retire will become increasingly heavy unless people retire later than ever before.

The fact is that people who have a pension plan with their employer come to depend upon it, but it is not a very reliable reed to lean upon. The business and private pension schemes are usually not very good, and relatively few firms have them. Those that do have them may go bankrupt or not be in business when their employees want to draw pensions. Sometimes the retirement plan is not fully funded even when it is supposed to be. Some firms may be merged with no commitment of the surviving firm to pay retirement benefits of the bought firm’s former employees. Sometimes funds paid into a pension fund plan were not “portable”. That is they could not be carried to another firm if an employee leaves and goes to another job. That tended to restrict freedom of movement of labor. Vesting of retirement rights after a certain number of years with a company is an improvement, but is not the whole answer. Our private pension system is a poor system indeed. Yet it is almost certain that fewer and fewer business and private pension plans will be offered in the future, or will be reliable if offered. The whole system is breaking down.

But why should any business be saddled with pension plans? Why should a business pay a former employee for however long he may live after he or she ceases to make any contribution to its production? There is no good reason for that. Continued payment when employment stops should not be a proper cost of doing business. Business should be relieved of the need to pay pensions except to those currently retired and still living. Payments into pension funds for current employees almost certainly reduces employees current wages. In a transitional period to a new system, wages should rise gradually while pension fund payments decline until they are ended. A reliable and equitable pension system can be provided by social insurance.



MEDICAL INSURANCE

Technically our medical care system has made tremendous progress during the 20th century. In the last half of the century we developed a medical insurance industry that slowly increased the number of people covered by at least some medical insurance, often as a fringe benefit paid by the employer. But increasing millions are either not covered at all by any medical insurance or are very inadequately covered, and businesses are reducing employee coverage substantially. A recent institutional change has been the development and growth of managed care in Health Maintenance Organizations (HMOs).
No one knows who will be hit when by crippling medical expenditures, although we know in general how many will be hit with medical expenditures of various sizes. We know our system to deal with this is increasingly inadequate.

Health insurance (really medical care insurance) has some special problems. The young and the healthy are optimistic and think they do not need medical insurance. But however healthy they are at any given age, they simply cannot know what medical expenses may hit them later and unexpectedly. Also health insurance companies have gotten very cagey, and they typically refuse to insure anyone they think might become a big risk, so anyone with a “preexisting condition” that might bode ill for the insurance company is refused insurance. They are the ones who might need it most. People who already have health problems almost all buy health insurance if they can get it, but for the insurance companies this adverse selection means relatively high insurance premiums have to be charged. So, many people now healthy do not buy medical insurance, even if they could, because of its high cost.

Much of the medical insurance now in force in this country is a fringe benefit for business firm employees. It developed largely during World War II when wage increases were restricted, but business could in effect give such increases by providing medical insurance as a fringe benefit and treat it as cost of doing business. That relieved their employees of buying the insurance out of taxed income, so it doubtless increased the amount of such insurance in force. Many businesses are still saddled with the cost of insuring their employees and often their families against medical expenses. That is not a normal cost of doing business.

Business should be required to carry only the costs which are due to on the job accidents and occupational diseases. They are required by law to carry workmen’s compensation insurance to cover those hazards. It is true that wages are probably lower than they otherwise would be when employees get medical insurance bought for them by the employer. It is also true that the employer gets lower cost insurance by insuring a group of employees than each of the employees could get if they insured individually.

Many businesses are now requiring their employees to pay some of the cost of their medical insurance, and increasing numbers of firms are ceasing to cover all their employees with medical insurance. Some firms now hire some of their labor as “independent contractors” to avoid paying fringe benefits. Between business failures and mergers that change employment relations and firms that feel they cannot afford to carry medical insurance for their employees, increasing numbers of Americans and their families are uninsured or underinsured for medical expenses.

But if everyone had to buy medical insurance, the costs would be spread over so many more people that the insurance premiums could be very much lower. A compulsory medical insurance system could protect everyone against this type of economic insecurity at relatively low cost per person, because only a few people in the entire population will actually have the crippling medical expenses that everyone needs protection against. This has been proposed several times in the past, but there was insufficient political sentiment for anything to happen. During the Clinton administration there was evidence that enough popular opinion had developed to support a universal medical insurance system. At the time that Hillary Clinton’s committee tried to propose reforms that it was thought represented a compromise among the various interests involved, some people, including our own Senator Wellstone, proposed universal medical insurance to cover all Americans.

The public debate over whether or how to reform medical insurance was one of the most serious low points of public debate in this country’s history. The public was initially ready to support universal coverage, but by the time the politicians had a field day misrepresenting the issues and the mass media publicized their nonsense, the public was so confused that the politicians happily defeated any attempt to improve the situation. If the nation cannot do better with other public interest issues than it did in that case, the future is not very bright. And indeed it is not, because it may be a long time, and things may have to get a lot worse before another political attempt can be made to provide an adequate health insurance system for everyone. And there is no guarantee that the politicians will not again talk to death any sensible proposals.

This experience raises the question of how, in an excessively adversarial and partisan political climate, the country can ever handle sensibly any real issue in the future. It should provide a real object lesson, but it is doubtful that either politicians or the media learned what they should have learned from the experience. Is there now much ground for hope for an adequate medical insurance system in the near future?

Medical insurance costs almost stopped rising while the debate went on, but are now rising again. Some of the increase is justified, but some raises issues not faced during the debate. As people’s incomes rise they spend more on medical care. As people age, they need more care. Hi-tech medicine is higher priced. We may have to spend more to provide proper medical care for the uninsured and the underinsured, though we will save by treating them earlier, rather than later in emergency rooms.

We are spending unnecessary amounts by being overcharged for some things. Pharmaceuticals cost much more here than in Europe. The prices charged patients for CAT-SCANS paid the entire original capital cost of the CAT-SCAN machines in a single year. The machines do not wear out in a year. Doctors fees and salaries don’t go down with oversupply of specialists but go up because they control the demand as well as the supply of their services. To deal with malpractice, lawyers gain by suing excessively, driving defensive medicine. Doctors & hospitals do everything possible to keep aged people alive another month even as “human vegetables” & try to keep premature babies alive who even with constant medical care will never live normal lives. We ration medical care now only to those who can afford it, so the protest during the debate that we must never ration medical care is absurd on the face of it. We will always have to ration limited organ transplants, even if nothing else, but shudder at more rational rationing than that of our present poor medical insurance system that rations so much by income.



LONG TERM CARE

In old age, some people who do not need medical care may get to the point where they cannot take care of themselves. Some need medical attention also, even to get them to take their medicine regularly. Some of these people can get care, at least on a part-time basis, in their homes, but some have to go to nursing homes that cost $40,00 or $50,000 a year. Most die within three years in such settings. The private health insurance industry has only recently begun to offer any good long-term care policies to deal with such old age care. Even when middle-class income earners get to the point where they might afford to buy such policies they usually are not even thinking of the possibility that in old age they might have huge expenses for nursing home care, and even if it occurs to them, it does not have a very high priority at the time. So insurance companies have difficulty selling many such policies until people reach old age, and then the policies are very expensive because they have few earning years left (if any) to contribute before they might need to call upon the insurance. Yet if everyone was required to buy such an insurance policy, private or governmental, beginning perhaps at age 40, and let their contributions grow at compound interest, the policies could be relatively inexpensive. Will we think through insurance possibilities like this, or will old age care be left to government to provide cheap nursing home care for the poor, while others will be unable to afford the care at all, or be reduced to poverty to be provided for poorly by Medicaid?

 


INFLATION

So far we have ignored the problem of inflation. If the price level rises very much that can reduce our standard of living fairly quickly, and worse, it can render quite inadequate all of our provisions against economic insecurity.

Unfortunately there is no way that the insurance industry can protect us against unknown future inflation. Even Social Security’s effort is inadequate because, for many of the aged, their medical costs rise faster than the consumer price index does.

It is often impossible for many people to get current income increases to keep up with the inflation. Indeed if they try very hard to do so, they will almost certainly increase the rate of inflation and so fall behind again. That was what happened when OPEC increased oil prices and gave us inflation in the 1970s.

If the money supply is allowed to increase too fast and produces inflation, the Federal Reserve must clamp down and prevent it in the future. If the government deficits spends too much when the economy is already producing at capacity, that must be stopped. If labor is demanding and getting wage and salary increases in excess of average productivity gains in the economy, the problem will be to stop that also. If business just waited until it had a chance to jack up its prices and that produced the inflation, the problem is how to stop that behavior. Some countries have tried to deal with the last two problems by getting business, labor and government leaders together and working out what they call a “social bargain” among them that restrains both labor and business so they do not cause inflation. We can hope that in this country we can also make some such fair bargain work to prevent any serious inflation by them.



SAVING

To suppose that people can generally save enough to deal with the economic insecurity that will hit only an unknown few is absolutely absurd. The Republicans who are trying to sell this nostrum politically are simply irresponsible and are playing on public ignorance of the beauty of the insurance principle. When everybody is required to insure against economic insecurity, the cost of such insurance is relatively low, because only a relatively few people, not everyone, will actually have large resulting expenses, so the pool of funds to which all have contributed small amounts can take care adequately of the relatively few whose financial needs become great. Social insurance is a wonderful solution of a problem that cannot in fact be solved adequately in any other way. The resistance to social insurance and the pretense that the problem can be solved by encouraging savings is entirely irrational nonsense .

We have examined in some detail the problems of economic insecurity. It is simply not true that people must be threatened by great insecurity to induce them to work hard. And even with the best social insurance, no one will be so secure that they will not have good reason to save what they can in addition. The question is how long will it take in the 21st century to see the development of a more rational and adequate social insurance system to deal with the economic security problems here elaborated.

Or will present trends continue and insecurity be less and less well provided for in this country, despite the ease with which the problems could be be dealt with better if we had the wit to do so?

People can by individual and joint effort determine the outcome, but they must employ government to get the job done and lay the basis for hope that things will be better in the respects discussed in this essay.






1 The classic statement of the case for social insurance, and indeed for the welfare state concept more generally, including the provision of various social services, was provided by Sir William Beveridge in SOCIAL INSURANCE AND ALLIED SERVICES, 1942, London, H.M. Stationery Office.

2 John E. Schwarz, AMERICA’S HIDDEN SUCCESS, Rev. ed. 1988, Norton.