“The existing social safety net policies and programs . . . are not well designed to reduce insecurity, increase risk-taking and help the nation prosper in the global innovation economy,” says a National Governors Association working paper.
Our setups for health insurance, unemployment insurance and pensions were all designed for a time when male heads of households worked their whole careers for one or two large and stable companies, layoffs were short and temporary, and retirement stretched from 65 to 75.
That’s all changed. Women account for a much bigger share of the workforce. People typically have a dozen or more employers during their careers, at companies of all sizes, with chances that the company they work for will be bought up or closed down by the time they retire. Layoffs are common and permanent. And retirement starts anywhere from 55 to 75 and stretches into a person’s 80s and 90s.
As a result, defined-benefit pension systems are history, unemployment insurance covers only about a quarter of those without a job, and health insurance costs are rising so fast that growing numbers of private-sector employees are going without. Oh, and did I mention that Medicare, Social Security and public-sector pension programs are gobbling up government budgets?
There are thousands of proposals on how to fix all this. It seems clear that the first step is to move from employer-based systems to ones in which people and the government take a broader role.
In health care, for example, one can imagine a system in which all workers and nonworkers are required to buy insurance from the government-regulated exchanges being set up in each region or state under the Obama health-care reform plan. In lieu of the tax exemption for employer-paid health insurance that benefits the rich and encourages lavish coverage, everyone would get a voucher to help pay for policies offered at the exchange, which could range from low-premium, high-deductible policies to cover “catastrophic” illness to high-premium policies that cover virtually everything.
Vouchers would vary according to household size and income, allowing for an additional subsidy for low-income families. Employers could provide additional taxable vouchers to employees, but otherwise their role would mainly be as premium collectors. In time, Medicare and Medicaid could offer their own vouchers, using exchanges and managed-competition to replace current programs.
If this sounds broadly like a shotgun marriage between Obamacare and the plan offered by Paul Ryan, the Republican chairman of the House Budget Committee, that’s because it is.
It would maintain the private-insurance model while giving most consumers more choices. It would ensure a choice of affordable, basic insurance plans for all Americans, irrespective of income, age, geography or health condition. It would generate a one-time cut in premiums through increased competition, reduced administrative and marketing costs and the creation of larger risk pools. And it would give employers and government a way to control the long-term growth in the cost of Medicare, Medicaid and private coverage.
Significantly, it would also largely get employers out of the health insurance business and end the threat that losing a job means losing medical care.
In the case of retirement income, only about 17 percent of private-sector employees are accruing benefits in a plan that provides retirees with guaranteed monthly income. Such plans proved too costly and risky for employers and useless to employees who don’t stay long enough for their benefits to be vested.
Today, about 60 percent of private-sector employees participate in 401(k)-type plans in which employers and employees make monthly, tax-free contributions into selected mutual funds. The defined-contribution plans eliminate the risk of employers and give workers immediate vesting, portability and control over how their funds are invested.
But they also have disadvantages. Most employers and employees do not contribute enough to fund a decent retirement. Many workers are uncomfortable making investment decisions and befuddled by the range of options. Most significantly, retirees are saddled with the risk that they will outlive their money.
The ideal system would combine the best of the old defined-benefit pension (guaranteed lifetime benefits, lower administrative costs) with the benefits of retirement accounts (greater choice, portability, immediate vesting and ownership of assets).
AllianceBernstein, a money management and market research firm, offers such a hybrid product to large companies, mostly as an alternative to a defined-benefit pension. The only choice employees make is to designate the year they plan to retire, leaving it to AllianceBernstein to make the investment decisions and gradually adjust the portfolio from stocks to bonds as the retirement year approaches.
Starting at age 50, accounts are charged a small annual insurance fee, based on the size of the account, to guarantee retirees will receive a fixed monthly payment irrespective of how long they live or what happens to their investments. Those monthly checks are drawn from the account, so long as there is enough money in it. Should it ever be depleted, the insurers will make good on the guarantee.
One can imagine variations on AllianceBernstein’s product — one with a higher investment risk and lower guaranteed payment, one with a lower risk and higher payment, maybe one in between. And one can imagine that asset managers might offer such products through a regulated exchange not unlike the one used for health insurance, with employees free to chose from the competing offers. The government would set minimum and maximum tax-free contributions for both employers and employees, with subsidies for lower-income workers. Employers would be largely out of the picture.
Initially, such a system could be used to build another layer of retirement security on top of Social Security. Once people got used to it, a political decision could be made (or not) to cap Social Security benefits at current levels and begin a gradual conversion over many decades from the pay-as-you-go system to the pre-funded and privatized system that Republicans have advocated. Also, this system could retain the take-from-the-rich progressivity that Democrats demand. Best of all, it would increase retirement savings and benefits for everyone.
A variation on this model of regulated competition could transform unemployment insurance into a more universal program focused more on retraining and reemployment. One can imagine insurance companies offering workers a limited number of competing programs through regional exchanges, with mandatory contributions from employers and employees. Benefits could be structured to decline gradually after 6 months unless regional unemployment exceeded 8 percent.
While unemployed — or at any time — workers could withdraw their contributions from their individual accounts to pay for education, training and counseling programs that meet federal standards for completion, placement rates and cost-effectiveness. At retirement, money left in the accounts could be rolled over.
These aren’t mostly my ideas — they are drawn from two decades of academic research, industry proposals and think-tank papers from the right and the left. The only thing radical about them is that they dare to ignore the paralyzing reality of a polarized political system that has left Americans with a frayed safety net perfectly designed for their grandparents.