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Sebastian Mallaby, Columnist

Ownership Society Still Needs Rules

By Sebastian Mallaby
Monday, November 22, 2004; Page A19

The Bush team's "ownership society" is mainly about Social Security: It wants to convert part of this government program into private retirement accounts. But the administration is skeptical of corporate collectivism as well as the governmental variety. It's not sure that your employer should provide your health care or your retirement plan. And it may well be right.

Corporations became the anchors of traditional benefit programs only by accident. During World War II, the shortage of workers forced companies to compete hard for them; and government-imposed wage controls forced this competition to express itself in non-wage benefits. Later, tax breaks induced companies to expand those benefits. But without the distortion of wage controls or tax incentives, corporate provision of retirement and health plans would make little sense.

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This case is most obvious for long-range benefit promises, which are already dying a slow death. Traditional "defined benefit" retirement schemes, in which workers put their faith in a corporate pension fund, are premised on a world of lifetime jobs and stable companies that exists only in myth. In the real world, workers change companies, and traditional retirement plans penalize job-hoppers. Companies get into financial difficulty, and raid their pension funds. In the past year alone, 192 defined-benefit plans went bust, shattering the retirement dreams of thousands of workers.

Because the promise of traditional pension plans is unreliable, it's no bad thing that they are dying out: The percentage of private-sector workers covered by such schemes has fallen by half, from around 40 percent to around 20 percent over the past quarter-century. For the same reason, the traditional corporate promise of health coverage in retirement doesn't make sense and is disappearing gradually.

What about companies' short-range benefit promises -- surely these are valuable? Take 401(k) retirement accounts: These are owned by individual workers, so companies can't raid them and they are fully portable. But 401(k)s exist because they are tax shelters: If these savings were taxed normally, there would be no reason for companies to get involved in workers' retirement planning or their choice of mutual funds. And there's a basic unfairness in this tax break. Why should workers at big companies get it, while freelancers, people at small companies and others have to puzzle their way through various obscure savings options that may not be as good?

Because of this unfairness, it would be better to eliminate preferential tax breaks for company-sponsored saving -- which would lead companies to withdraw from sponsoring 401(k) plans, just as they are already withdrawing from traditional retirement schemes and retirement health promises. The Bush team's budget-busting tax cuts do at least have the merit of pushing in this direction. The administration has already cut taxes on saving, reducing the 401(k) advantage. It aims to push further, allowing savers to shelter so much money from the tax man that 401(k)s may become redundant. What of company health benefits for current workers, on which millions of Americans depend? The cost of providing health coverage has exploded along with medical inflation; between 2000 and 2003, the percentage of Americans covered by employment-based health benefits fell from 63.6 percent to 60.4 percent, according to the Employee Benefit Research Institute. With a little extra push, this slow attrition could become a stampede for the exit. And, according to an article Thursday by my colleagues Jonathan Weisman and Jeffrey H. Birnbaum, the Bush administration is mulling the idea of eliminating the tax incentive for companies to provide health coverage.

Would this be an error? The answer is complicated. But tax-sheltered corporate health care is unfair and wasteful. People at small companies and temporary or unskilled workers often get no coverage. Meanwhile, privileged workers get coverage that's over-fancy because it is subsidized by taxpayers and doubly wasteful because it separates the decision to spend money from the responsibility for paying. So long as the bill is on the company, the doctors and patients who make medical choices have no incentive to constrain spending.

Individual purchasing of health coverage would create an incentive to shop wisely for insurance, especially if the shoppers used after-tax dollars. But the individual insurance market would have to be regulated firmly. In a free market, insurers would not be doing their jobs if they didn't charge risky patients extra; and risk factors could include class, race and genetic data. Risky customers would be charged not just a bit more but many times more, because some 80 percent of the nation's health costs are generated by 20 percent of patients. In a free market, in other words, the sick, the poor and the genetically unfortunate could not afford insurance.

Before it proceeds any further with its trial balloon, the Bush team better emphasize that the market for individual health insurance would have to be regulated into providing socially acceptable results. There would have to be rules on which risk factors insurers could consider (smoking yes, race no, and so on); and insurers might have to be subsidized to take on patients with preexisting conditions. None of this would be simple. But corporations are clumsy anchors of health and retirement systems and are in any case withdrawing from this function. Other options could work better, provided they are done right.


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