It’s time policymakers recognize that in the new global economy, growth and economic security go hand in hand.
To help individuals supplement this basic level of protection, government could transform the current set of inefficient and inequitable financial incentives offered to workers to obtain health insurance and health care. Currently, employer-paid health insurance benefits are excluded from an employee’s income for taxable purposes. As described recently in the pages of this journal by economist (and director of the Hamilton Project) Jason Furman [“Our Unhealthy Tax Code,” Issue #1], this is the single largest subsidy in our tax system, costing approximately $200 billion annually. Because employer-based insurance benefits are deducted from taxable income, the exclusion is linked to marginal tax rates and thus provides much greater benefits to those with higher incomes. The current exclusion is also inefficient for two reasons: It provides a larger subsidy to those most able to afford health insurance on their own, and it encourages the purchase of more generous health insurance plans than people otherwise would have chosen, which creates little incentive for people to be cost-conscious health care consumers. A better approach would be for the government to replace the current exclusion with a flat-rate refundable tax credit for the purchase of health insurance or health care. President George W. Bush’s recent health insurance proposal–which limits the amount of the tax subsidy and makes it available to people without employer-provided coverage–is, in certain respects, a promising response to these problems. (Though it falls short in critical respects: It would likely cause a shift away from employer-sponsored coverage without providing alternative pooling mechanisms in the individual market, and it would continue to provide a larger subsidy to those with higher incomes.)
Additionally, the government could use “reinsurance” to make it easier for smaller affinity groups, such as small unions or religious groups, to form alternative risk pools and offer health insurance. By capping the insurer’s potential liability, reinsurance prevents a few high-cost individuals from significantly raising premiums for everyone else in small risk pools. Additionally, as reinsurance reduces the variance in private expenditures, and thus the risk to insurers of the impact of a high-cost individual, insurers would spend less on efforts to avoid offering health insurance to the very sick, thereby reducing administrative expenses that provide no benefit for society as a whole, benefits confirmed by a 2004 Urban Institute study.
For individuals, by providing access to alternative risk pools, this New Social Compact would mean that their health insurance coverage would no longer be tied to a specific employer, thereby solving the problem of “job lock” associated with the current employment-based system. In exchange, individuals would continue paying payroll taxes and could have their health benefits conditioned on responsible and healthy behavior, such as under West Virginia’s Medicaid plan: Individuals are eligible for enhanced health coverage benefits if they fulfill responsibilities outlined in a “Personal Responsibility Agreement,” including having preventative screenings, showing up for appointments, and participating in health-improvement programs.
Securing Broad-Based Growth
At a time when American workers and firms face growing competitive pressures from globalization, it may appear attractive to try to save jobs and benefits by intervening directly in the free market and imposing heavy-handed regulations and restrictions on firms. Yet such an approach is ultimately self-defeating. It hurts long-term economic performance and ignores the private sector’s inexorable retreat from providing health care, pensions, and other forms of security. New problems require new responses.
A more growth-enhancing, and thus self-reinforcing, way to promote economic security is for government to fill that void with well-targeted programs that provide a basic level of protection directly and that also make it easier for families to obtain additional levels of protection. As the traditional employer-based model for providing economic security disintegrates, it is time for a New Social Compact that will allow us to fulfill our nation’s promise of upward mobility–the broad-based opportunity for individual advancement that has provided a powerful incentive for industrious activity and thus spurred unprecedented economic growth for more than two centuries.
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