Why Are We Going Broke?

In the United States, the national debt now equals 100 percent of gross domestic product (GDP), and is still growing. With the retirement of the baby boomer generation, 78 million additional people will turn to the federal government for Social Security, Medicare and Medicaid benefits — roughly $40,000 per beneficiary per year, on the average. If we continue on the current course, the federal government will need to more than double the tax revenues it now collects by the time we reach midcentury, according to the Congressional Budget Office. At the same time the government prepares to take more of our income, it is also making it increasingly harder to earn that income. Additional taxes and regulations are raising the cost of labor, reducing the rewards for working and making the economy less productive than it could be.

Why are we having these problems? What can be done about them?

The main reason for the growth of government in the 20th century was the creation of programs designed to protect the middle class against certain risks. This took the form of social insurance against contingencies most people could not easily insure against on their own in the private marketplace. In the United States, the federal government provides an income, pays medical bills and covers a large part of the cost of long-term care for people during their retirement years. For people of working age, the federal government is insuring against disability and unemployment. State governments are also involved — forcing employers to insure workers for injury, death and disability on the job.


I keep right on pretendin’, but I can’t do that anymore
No, I can’t do that anymore

In almost all cases, government insurance is monopoly insurance, instead of a service that arose through competition in the marketplace. Government insurance is also subject to special interest political pressures that undermine its rational provision. As a result:

  • Social insurance is almost always more expensive than it needs to be. Disability insurance in the United States and Europe, for example, is twice as expensive as private disability insurance in Chile. Both Medicare’s health insurance for the elderly and the disabled and Medicaid’s long-term care insurance cost about twice as much as well-designed private insurance should cost.
  • Social insurance is impervious to consumer needs. Medicare, for example, covers many small expenses that the elderly could easily afford to pay for out of pocket, while leaving seniors exposed for thousands of dollars in catastrophic costs. Both Medicare and Medicaid prevent patients from adding out-of-pocket expenses to the government’s fees in order to purchase timelier, higher quality care.
  • Social insurance is almost always one-size-fits-all, ignoring important differences in individual needs. Social Security, for example, completely ignores other sources of retirement income and prevents seniors from using their government annuity, say, to purchase assisted living.
  • Social insurance often provides benefits that are of poor quality. Many seniors, for example, pay three separate premiums to three separate health plans and yet still lack the comprehensive coverage that many nonseniors have access to and take for granted.
  • Social insurance is almost never accurately priced. Because unemployment insurance premiums fail to reflect the real probability of unemployment, the program actually encourages employers to provide seasonal, rather than year-round, jobs. Because workers’ compensation insurance is not accurately priced, employers face highly imperfect incentives to make their work places safer.
  • Social insurance almost always creates perverse incentives. Social Security encourages early retirement. Medicare and Medicaid encourage the wasteful over-use of medical resources. Unemployment insurance is almost literally paying people not to work.
  • Long term social insurance is almost never properly funded. Because of the temptation to spend payroll tax revenues that are not needed to pay social insurance benefits on other politically popular programs, social insurance is almost always operated on a pay-as-you-go basis. This has resulted in huge unfunded liabilities both in this country and abroad.

Is there an alternative to all this? Fortunately, yes. Singapore is a country that has no social security system and it has also avoided most other welfare state institutions of developed countries. Yet no one in Singapore is starving. It has the highest rate of home ownership in the world and the vast majority of people reach the retirement age with substantial assets.

How do they do it? In Singapore, people are required to save a substantial part of their income to meet basic needs. But they have considerable discretion over how the funds are invested and they have very wide discretion about how they use their savings to meet their needs.

Chile is another country that has been exceptionally innovative in liberating people from social insurance institutions. Chileans are required to save in individual retirement accounts. But once they have saved enough to purchase an annuity to provide a minimum retirement income, they have complete discretion over what they do with the remaining funds — even if they are only middle aged.

Chile also has the world’s most innovative disability insurance system and the world’s most innovative unemployment insurance system. Both systems involve substantial individual control over resources and leave individual workers with considerable freedom to make their own decisions.

Other countries around the world have been catching up. More than 30 countries have completely or partially privatized their social security systems with individually owned accounts. There is much to be learned from these experiences.

Comments (13)

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  1. Davie says:

    What an interesting post! It’s reassuring to read about practical alternatives that already exist.

  2. Anne Alice says:

    I’ve seen very little elsewhere on Singapore or Chile. Why is that?

  3. Buster says:

    Social insurance invites special interests to lobby for enhanced benefits. It is also is a vehicle politicians can use to feather their own nests. Politicians who want to perpetuate their own time in office would rationally pander to constituents knowing the bills won’t come due until after his or her time in office is long over. Many of the programs we have today have expanded in scope since their inception. When Social Security was first envisioned, most people could expect to die not long after reaching Social Security age. Nowadays people who reach retirement age are expected to live a decade or two longer. Designers of social insurance didn’t really anticipate that most would reach the age of eligibility and live years longer. But — over time — the mission of Social Security has shifted to the point that advocacies for the elderly have no shame is asking for even more. Many people sort of assume the status quo is what designers always intended but that’s not necessarily the case.

  4. Singapore was very interested in my approach to healthcare back around 1992 because we both mandated personal savings.

  5. Greg says:

    Answer to your titular question: yes.

  6. Al says:

    A lot of time is spent discussing comparative systems and how different manipulations of the systems have positive results on abstract averages which really hide what is actually happening. The big determinate of future success or failure that is missed when concentrating too much on abstract averages is demographics. Perhaps we should spend more time concentrating on real numbers that involve real population groups and stop trying to adjust an entire nation to all those needs by attempting to focus almost exclusively on a safety net for the populations at risk.

  7. Jennie Fiedler says:

    Watched an interesting documentary about the differences between a money based economy and a resource based economy. Resource based is better as it is not predicated on debt the way a money based economy is. I gathered its all about controlling the masses. When emphasis shifts from making monetary profit for the few to developing the potential of the many it solves all of these problems. As long as 90% of the world’s wealth and resources are controlled by roughly 10% of the world’s population there will be overty and debt as it is built into this type of system. Interesting.

  8. Charlie Bond says:

    Hi John,

    I had lunch last Tuesday with my friend Al Simpson and Erskine Bowles. There is no question this country faces a debt crisis that could not only cripple our economy but badly compromise our national security–and it is being driven largely by heallth care costs. Erskine agreed that if we could reduce health care spending so it dropped from 18% of GDP to 15% of GDP our country would be saved from the debt crisis we now face and there would be more than enough money left over to kick start the economy.

    I think you and your readers probably would not have too much trouble identifying 1 in 6 dollars we waste in delivering health care (e.g., tort reform,raising Medicare eligibility, etc.) The problem is most of those wasted dollars are going into the pockets of various health care players whose immediate greed is outweighing this country’s long-term need.

    As Al and Erskine compellingly point out, our debt situation is not and cannot remain a partisan issue. Nor will it be resolved by wrapping rigid ideology in bellicose rhetoric. It reaches from the Capitol to City Hall and from Wall Street to Main Street.

    Our country is in desperate need of statesmanship and leadership. The solutions must be surgical and precise.

    Those of us who know the inside game in health care have to come forward to lead the reforms and counsel sacrifice on everyone’s part.

    We are a compassionate country by nature and we will have a social safety net. You have identified some of the ways it can be redesigned. That redesign, however, must include corporate and institutional changes as well as individual sacrifices We cannot afford the status quo and we are locked in (or is gridlocked in?) to a path of sure financial failure unless folks like the readers of this blog begin to use their considerable intelligence, insight and influence to counsel their constituencies to change voluntarily.

    Every day there is more and more evidence that health care cannot be reformed from the top down. It must be reformed from the bottom up. As your post points out, it is possible to make changes for the good of the people and the country. These changes are not a matter of politics but pragmatics.

    We cannot borrow 40cents of every dollar our gov’t spends to nurse the Baby Boom generation through its “maturity.” Yet we are not a country that will let folks suffer and die needlessly. There must be a vehicle for working together to address the problem creatively and collectively.

    It is for this reason that we are working on The Patient-Physician Alliance which is being created to mobilize the considerable resources and ingenuity of Americans to address their health and health care issues individually and in community using free enterprise solutions and voluntarism.

    We would welcome volunteer advisors from your distinguished readership. The organization is non-profit and decidedly non-political. It is being built community by community linked through a national organization designed to facilitate communication and interaction and help build critical mass.

    As Al and Erskine so marvelously demonstrate, it is possible to be intensely patriotic without being demogogic. It all begins with small steps by lots of people. It will mean compromise and flexibility, which are necessary attributes of any people who live successfully together, whether in a family, a community or a nation. It will mean maintaining concern and compassion for each other, but being mindful of the greater good over the long term–again traits of successful families and communities.

    We are incredibly fortunate to have the health care system we have in this country. It evolved, however, in an age of young, healthy Americans willing to pay for unlimited care and medical advancements. Now as we face our greatest demographic challenge, we can and must bring our considerable collective intelligence to making the system work within our means. Your post provides some relevant ideas. Now is the time to work together to begin implementing the kinds of savings that this country must see in both the short-term and over the long haul. Thank you and keep up the good work.
    Charlie Bond

  9. Brian says:

    Eventually, the persisting economic situation in the U.S. involving entitlements and the growth of the public sector will force us to privatize SS and Medicare.

  10. Richard E Carlson, MD says:

    There is a growing cohort of physicians who have ‘early retired’ (or wishing to) and could provide informed and motivated input to the energized leadership of the Goodman/Charlie Bond variety.

    Most of us are grateful for being out of the chaos of providing care, but have ideas that could inform ‘what might be’ or ‘what could have been’.

    Best wishes.

  11. frank timmins says:

    At this particular point in time (with the Obamacare mandate issue about to be decided) I feel a little ill at ease advocating a Singapore or Chilean version of “mandated” savings. While realizing there is a huge difference between mandating a citizen pay for a particular product vs. simply altering the rules of the current payroll tax obligations, I wonder if the conservative constitutional objection to the ACA mandate provision is weakened philosophically (from the perspective of the Great Unwashed).

    John Goodman points out that our debt now equals our GDP. It is clear that This cannot be paid off without serious austerity measures. It is also clear that democrats are aware of this as well. Because democrats will never agree to the necessary debt reduction solutions, it is obvious they plan to devalue the dollar as a strategy to stave off bankruptcy.

    Assuming that my conclusion is accurate, why are the democrats not publicly challenged in this regard? I suppose the contraceptive question is a much more compelling subject for public debate.

  12. Floccina says:

    You forgot to mention FDIC which charges the same premium to an institution that is leveraged to an insane extent as to an institution that is modest. IMO the federal reserve should be privatized, made into a for profit organization and should provide insurance to member banks.

  13. David Alexander says:

    Back to the title, “Why are we going broke?”, I have often heard the comment that what is needed is “structural change”. In that context, I believe a needed change is the minimization of government employment and a maximization of private sector employment. Government employment is inherently difficult to control. There are no real incentives to improve productivity. Individual employers, ie subcontractors selected by competitive bid, have a much better chance of delivering “essential services” in an efficient manner. Private sector use of HSA’s, 401k type plans, 529 education plans, and other incentive based free market social plans can help bridge the gap which now exists to achieving a more sustainable financial safety net. The problem of endless unfunded liabilities is also reduced if not eliminated. The work done in Wisconsin and Indiana are examples of how this might work.