April 06, 2005

The Looming Entitlements Beast

As has been covered elsewhere, Dale at QandO is discussing the dangers of Social Security and Medicare to the national budget - and by extension the economy as a whole and wages in particular. At the rate it's going, tax hikes to cover Medicare and Social Security will cancel out almost all real growth in wages.

Just stepping back for a second, I think we can all see what's causing this problem. We're paying more and more to old people in entitlements; Medicare's prescription drug benefit cost hundreds of billions; Social Security is indexed against products instead of wages. As a result, we're generally increasing the size of entitlement payouts. And people are living longer, so using more and more of Social Security and Medicare. As the superannuated live into their 80s and 90s on a very regular basis, we're seeing people drawing welfare for a solid three decades.

The solution to Social Security is pretty clearly personal accounts. Getting people invested in the stock market is a great way to create more wealth and to alleviate budgeting issues in the SocSec fund. The solution to Medicare, similarly, is to give tax shields (Medical Savings Accounts) for people to purchase their own health insurance, while there would still be means-tested Medicaid. Coupled with the amassed assets from a personal account, you'd have a doubling effect. But even if we fix one or the other (somehow) then we still have a problem with the other.

I'd also give the following suggestion for Medicare: welfare reform. With personal accounts we can move some of Social Security to individuals and the market, keeping the rest federal. But simply 'marketizing' Medicare all at once would not likely happen (nor should it, since that would be chaotic to predict the outcome). Instead of trying to move to a market solution immediately, we should look at putting Medicare under the responsibility of the states. The withholding tax that goes to Medicare could go directly to the states, with their own responsibility for raising or lowering that tax.

I don't know all the specifics of Medicare, but I do know that moving it to the states would allow innovation and experimentation. They could fiddle with premiums, deductibles, withholdings and so forth to find ways to optimize our senior-care dollars. Of course, the poorest seniors would also have recourse to means-tested Medicaid.

An alternative solution is to replace Medicare with a scheme of private insurance. Using, perhaps, a seniors-only Special Medical Savings Account plan (unlimited-size tax shields, instead of limiting annual protection to $5k or whatever) we could stop taxing the money seniors need to spend on insurance and health care. Above and beyond that we could turn this into a means-tested program and simply give poorer seniors the additional money to buy their own insurance. But the MSAs would definitely help in this area.

Medicare often has gaps or is simply not accepted in some places. As a result, for a while many seniors get "Medigap" insurance policies to round out their health coverage. They also need private insurance if they want nursing home coverage, because Medicaid doesn't cover it. If they're already supplementing health care with private insurance, we ought to simply help them pay for their private insurance to cover all of it. It's crazy to have both government and private insurance when one could do a better job alone.

Private insurance is also much more flexible. Under Medicare, seniors buying Part B insurance (about 90% of seniors) only have five or six options for coverage. Rather than letting seniors buy ONLY the coverage that meets their needs and demands, Congress forces seniors to pick one of a half-dozen cookie-cutter policies. If we moved to subsidizing seniors in buying private insurance, they could choose from the wealth of options available on the market.


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