How We Can Keep from Going Broke, Part I

Social Security, Medicare, Medicaid and other social insurance programs are bankrupting America. They will produce ever-escalating deficits for as far as the eye can see.

So what can we do about it? All we hear out of Washington are “eat-your-spinach” solutions — both from Democrats and Republicans. These involve cutting benefits, forcing doctors to ration health care, etc. Naturally, the beneficiaries resist such change.

My colleagues and I at the National Center for Policy Analysis have been thinking about a different approach. Reform of entitlement programs should be a win-win proposition. That is, it should be good for the individual who agrees to accept fewer government benefits as well as for the taxpayers.

Does that sound too good to be true? Read on.

I think we can make it, if we try.
I think we can make it, if we try.

Here is part of the idea.

Opportunities to Opt Out. People of any age should have the choice to opt out of social insurance in favor of alternatives that better meet their individual and family needs. In particular, they should be able to substitute assets and arrangements they have voluntarily chosen, and that they own and control, for the government systems they are now forced to be part of. In particular:

  • People should be able to substitute private savings, private pensions and annuities, and private insurance for participation in Social Security.
  • They should be able to substitute private insurance and private health savings for participation in Medicare and for participation in the federalized health care system sometimes called ObamaCare.
  • They should be able to substitute private disability insurance for participation in the federal disability program.
  • They should be able to substitute private savings, private pensions and annuities, and private insurance for participation in Medicaid’s long-term care insurance.
  • At their place of work, employees and their employers should be free to choose private unemployment insurance arrangements, private disability insurance and private alternatives to workers’ compensation.

The Conditions for Opting Out. There is only one general condition that must govern these choices: They must not increase the expected burden for other taxpayers. This means (1) there must be a reasonable expectation that the direct tax burden for others will not rise as a result of an individual’s opting out and (2) there must be a reasonable expectation that the individual will not try to return to the government program (thus creating an additional burden for everyone else) if the private option turns out to be disappointing.

Limits on Finding Solutions. In fashioning better solutions, we cannot ignore why these programs were created in the first place. Government does more than offer insurance. It almost always makes the insurance compulsory. Why is that?

There are a great many insurance purchases that are largely ignored by government. These include life insurance, homeowners insurance and automobile collision insurance. Why is government involved in some of these decisions and not others?  There is actually a rational reason based on economics. Most of us are basically indifferent about whether people insure to protect their own assets. We do care about decisions that could create external costs for the rest of us, however.

Through Social Security, we force people to pay for life insurance benefitting dependent children (who could potentially become wards of the state) but not for a working-age spouse. All but three states force people to have auto liability insurance (covering harm to others) but not casualty insurance (covering their own cars). We basically don’t care whether people insure their own homes, but we force them to contribute to retirement and disability schemes to prevent their accidental dependency on all the rest of us.

Here is the principle: government intervenes in those insurance markets where people’s choice to insure or not insure imposes potential costs on others. Because of our basic human generosity, we’re not going to allow people to starve or live in destitution. So when people don’t insure for retirement, disability and so forth, society is going to step in and help where help is needed. Implicitly, we have a social contract that socializes the downside of certain risks. If we allow the upside to be left to individual choice, we will have privatized the gains and socialized the losses. When people don’t bear the social cost of their risk-taking, they will take more risks than they would otherwise.

Another way to think about the problem is in terms of the opportunity to become a “free rider” on other people’s generosity. Consider the person who has no life insurance for dependent children, no disability insurance and no retirement savings program. Because he is not paying premiums or saving for retirement, he can consume all of his income and enjoy a higher standard of living than his cohorts. But if he bets wrong (dies too early, becomes disabled, reaches retirement with no assets), he is counting on everyone else to help him out.

Here’s the upshot:  In fashioning better choices for people, we must at the same time prevent them from becoming free riders on the rest of society if their choices do not turn out as well as planned.

Achieving Minimum Social Objectives. Before considering specific opportunities for win/win reforms, it’s worthwhile reconsidering what the goal of social insurance is. In 1935, very few people had a retirement pension. No one had an Individual Retirement Accounts (IRA) account or any of the other savings vehicles that have subsequently been added to the tax law. Life expectancy fell far short of age 65 anyway. So for the vast majority of people, Social Security was seen not as a replacement for private retirement savings but as something new — an additional source of income for the minority of people who would grow old enough to have to rely on it. Similarly, in 1965, very few workers had an employer promise of health care benefits after retirement or any other kind of post-retirement health care plan.

Today things are different. More than 21 million workers have a defined-benefit pension plan and 46 million are building retirement assets in IRA, 401(k), 403(b) and other defined-contribution accounts. In addition to private employer-sponsored plans, many workers can look forward to a military pension or other government retirement benefits. About 27 million workers have a promise of post-retirement health care benefits from an employer and millions of veterans will have access to VA health care benefits. All of these programs can potentially substitute for promises made under Social Security and Medicare.

Take the 44 million workers who have private pension plans insured by the federal Pension Benefit Guarantee Corporation (PGBC). The assets of these plans are invested in stocks and bonds and other assets. However, should the investments fail to pan out or (a much greater risk) should the employers who sponsor these plans go bankrupt and become unable to keep making the required contributions, the PGBC promises a minimum benefit to the retirees. Could this minimum benefit serve as an acceptable substitute for whatever we hope to accomplish through Social Security? If the answer is yes, then we should consider making a lump sum payment to these workers today in return for their agreement to forgo Social Security benefits in the future. Alternatively, we could consider a permanent reduction in their payroll tax rates.

Could health care coverage from the Veteran’s Health Administration serve as an acceptable substitute for the minimum health insurance we want people to have under Medicare? Would an annuity from a major financial institution or a promise of pension or health care benefits from a state or local government count as acceptable alternatives? Again, if the answer is yes, then we could consider making these workers a financial offer to buy them out of their right to receive some or all of their Social Security and Medicare benefits.

What about private savings? If they are to serve as acceptable substitutes there would probably have to be some assurance that the funds would not be squandered or gambled away. Part of the requirement might be that the funds be held by reputable financial institutions and that they be managed according to prudent investment rules. There would also have to be rules governing the rate of withdrawal during the retirement years and a general prohibition against putting the asset up as collateral for loans or other indebtedness.

How to Make It All Work. Given that there are many private vehicles for achieving the social goals of social insurance, how can we take advantage of them? That is, how is it possible to enact reforms that make everybody better off? This is the subject for Part II.

Comments (15)

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  1. Davie says:

    The trip back through time to examine the goals of social insurance was a particularly compelling touch. Very well-written and persuasive piece!

  2. Vicki says:

    Nice song pairing.

  3. Tom H. says:

    Excellent analysis.

  4. Robert A. Hall says:

    If the poor and feckless wish to “opt out” and blow it now on booze, drugs and lottery tickets, it will be hard to stop them on the “creating a burden” test. Many of them have not been giving the education to manage money, not any ethic in delayed gratification. Many are also minorities, so stopping them from opting out would be deemed “racist.” Then, 20 or 40 years hence, when they show up on the government’s door step broke and sick, will we turn them away? I will link to this from my Old Jarhead blog.

    Robert A. Hall
    Author: The Coming Collapse of the American Republic
    All royalties go to help wounded veterans
    For a free PDF of my book, write tartanmarine(at)

  5. Brian says:

    There are probably some good ideas for reform on the way.

  6. Mark L. says:

    Thank you for the excellent discussion of such ideas. Of course the elegance of your ideas are that a person chooses to take the status quo or not. We must do something, lest we have the most predictable financial collapse in history.

  7. Pearl Lambie says:

    John,you’re starting to sound like a liberal here! Hope you get with the program in PartII!

  8. Buster says:

    That’s a tough one. The only possible way to keep us from giong broke is by going back in time and passing a balanced budget amendment for U.S. expenditures the way states have to balance their budgets.

    Come to think of it… going back in time and convincing our forbearers to pass a balanced budget amendment would probably be easier than convincing today’s politicians to oppose the AARP and reel back in the entitlement promises paid for with OPM (other people’s money).

  9. frank timmins says:

    This problem can only be partially analyzed using current statistics. IMO the largest factor can’t be produced using a calculator, and as far as I know there is no programmed algorithyms that can create a predictive model for it. The most important tool of change is the culture, or – the accepted mode of behavior in a society.

    As far as I am concerned it is the same cultural phenomenon as we see in the resistance of many to adopting an HSA. People seem to naturally drift to the path of least resistance if possible. On the other hand, when such path is not available people have truly amazing capabilities to manage challenges and improve the situation for themselves.

    I wish we had a leader that had the charisma to champion the mindset of self-reliance and re-introduce it into the culture. It would make ideas (as John Goodman’s) for repairing the economic situation much easier to sell.

  10. Jim and Pat Lanier says:


    God bless you and your team for having the wisdom and courage to provide rational thinking to this vast problem. We are in our early 70’s and I assure you we don’t like being the victim of the current Medicare program. We would much prefer to have the ability to pick and chose the coverage that we like as we did earlier in our lives and as you say just like we do with other coverage policies. Unfortunately, we are “stuck” with the “benefits” of an antiquated and irrational health care system that neither we nor our doctors support and it is a poor choice for people who have tried to do the responsible thing. We hope you efforts are successful and will remove the current unfair Medicare policies.

    Jim and Pat Lanier
    10 Rushing Oak Court
    Huntsville, TX 77320
    Home (936) 295-2441
    Pat cell (512) 461-2133
    Jim cell (512) 496-0006

  11. charlie bond says:

    Hi John:

    The compulsion to care for others is a moral compulsion, and the SCROTUS–I mean SCOTUS–will tell us if it is a legal compulsion. Either way our country must look behind big corporations and big government to address the fundamental needs of our aging population. That does not mean we can just take a “let-them-eat-cake” attitude and adopt the principles of pure laisser-faire, because every study shows the more we “laisser” (let go), the worse the population “faires”.

    The conundrum before the country is how to reverse our dependence on Big Health and realize our interdependence on big heart–i.e., the spirit of voluntarism and communitarianism that must drive health care for the next generation.

    While Big Government, Big Health and Big Economists struggle to perfect a payment scheme, the rest of us are going to have to figure out how do more for ourselves and each other outside the corporate and institutional systems that drive the payment schemes. With coverage and reimbursements declining we are already being called upon to take on more of the responsibilty ourselves. Now we have to learn how to work with our doctors, hospitals and other providers (and more importantly, they have to learn to work with us)to make health care a community activity.

    The underlying social problem is that medicine has so advanced that illness and death are no longer a persence in day-to-day life. (Historically caretaking happened at home, with illness, injury and death occurring more frequently to younger folks. Mortality was a more constant companion.) Now, Aunt Tilly does not come to stay at the house to be nursed in her old age; she doesn’t have her heart attack and die in the parlor. Instead, she is sent to a long-term care, and when the heart attack hits, she is whisked off to the hospital, placed in the CCU where her family and friends can see her for two minutes at a time, with the expectation that she willl be medically tuned up and discharged in a few days–good to go another 100,000 miles.

    Forgive the hyperbole, but we must all be aware that a byproduct of our tremendous medical advances has been not only a greater dependence on institutional answers, but a corresponding desensitization to the needs of others, to the meaning of illness and injury, to the value of health–but most importantly to an appreciation that at any moment any one of us could be in need of care.

    We often say that the young won’t buy insurance because they believe they are invincible and immortal. I must still be young, because all too often I catch myself thinking exactly the same way. When we or our loved ones are not sick, we tend not to think of health care. A measure of the efficacy of our medical system is that we can be free from what must have been a constant anxiety for our forebears.

    Indeed, this has created a naming challenge for the Patient-Physician Alliance. In fact the Alliance is for all members of the public, not just the actively sick (which is what is implied by the word “patient”) It is also for all providers (especially including hospitals), not just doctors. We have stuck with the name Patient-Physician Alliance because of the imagery evoked and the fact that the patient-physician relationship is the key trusted individual relationship at the core of health care and is its transactional and economic driver. However, we would welcome any ideas to make the name more universal.

    In sum, economic reform is certainly an imperative. But changing Americans’ appreciation of their responsibilities to themselves and to their neighbors is the surest way to effect real reform from the bottom up, not the top down.

    Charlie Bond

  12. Dr. L. Brody says:

    These are excellent and noble ideas. Unfortunately, we are not in a utopia, and our consumer society is much more interested in what the government can give them than what their own efforts can provide. Also, why would BIG GOVERNMENT want to give up control of all those assets, resources and benefits, that they so far have funded by accounting tricks and money printing.

    We would have to go back to a post-World War II mentality where people wanted to work, wanted to own a house and wanted to get education, and there was less interest in entertainment, sports and diversions; in other words, the work ethic dominated the pleasure principle. That was also more of a cash and carry society. I can’t believe the government would allow itself to weaken and the banks would give up their debt producing profitable devices for a self-sufficient society. This would take 2 generations in my opinion.

  13. Frank Timmins says:

    Dr. Brody writes, “I can’t believe the government would allow itself to weaken and the banks would give up their debt producing profitable devices for a self-sufficient society.”

    I don’t think there is going to be any choice. Printing money is an ultimate death sentence for the government that is doing it (to pay its bills). The question is do we ride this hell bound train all the way to the end of the line, or can we convince enough people to stick their legs out and drag their feet to stop this choo choo. We ARE the government.

  14. Butler, Stuart says:

    John: This is a very thoughtful piece. I look forward to reading Part II.

    Best, S.

  15. Jennie Fiedler says:

    Privatizing everything will work just fine as long as one thing is accomplished: The financial sector in this country is held strictly accountable for its actions. In 2008 I watched many of my coworkers kiss their retirements, homes and jobs goodbye as Wall Street plundered and trashed our economy. Pensions are ripped off, insurance companies go belly-up from gambling with policy holders’ funds and have to be bailed out by-wait for it-taxpayers! The very people they ruined. When we can trust our financial sector again it will work.