Social Insurance Programs

AEA Annual Meeting Papers
Rethinking Social Insurance
Martin Feldstein*

Social insurance programs have become the most important, the most expensive, and often the most controversial aspect of government domestic policy, not only in the United States but also in many other countries, including developing as well as industrial nations. . . Together they accounted in 2003 for 37 percent of federal government spending and more than 7 percent of GDP. These ratios have increased rapidly in the past and are projected to increase even faster in the future because of the more rapid aging of the population.

Research by Jeffrey Liebman (2002), based on a large sample of actual individual earnings histories, showed that less than 10 percent of Social Security benefits represented net redistribution across income groups within the same birth cohort.

Unemployment Insurance (UI) also does not redistribute to the poor. In Massachusetts, a state considered to have a very generous UI program, the UI benefits were financed in 2003 by a payroll tax on only the first $10,800 of earnings (with a zero marginal tax rate above that level) while basic benefits were 50 percent of previous wages up to more than $50,000 of wages per year. An individual who earns $50,000 a year pays the same tax as someone who earns $11,000 a year but would receive benefits that are nearly five times as high.

Social insurance programs cost $800 billion in 2003, while federal spending on all means tested programs except Medicaid was less than $150 billion.iv Over the past four decades, the spending on means tested programs (except Medicaid) has remained relatively constant (rising from 1.0 percent of GDP to 1.3 percent of GDP) while the social insurance programs that are not means tested rose from 2.7 percent of GDP to 7.4 percent of GDP.
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Feldstein and this Author diverge at this stage. Feldstein's panecea for the overall problem of social insurance is Private Accounts. He argues that the current system of Unemployment insurance produces higher payments paid longer because of dismissal of less-than-perfect Job availability; suggesting Private reservior Accounts which would have to be refunded after each period of Unemployment payments. An Accounting hassle beyond imagination; Solution: Simple garnishment by Unemployment (UI) until all remittances have been repaid.

Feldstein stipulates Social Security benefits effect inverse redistribution by varying Benefit payments and the Better-off living longer; proclaiming Private Accounts would be individually-filled with Benefits based upon total size of accured assets. Facts: current unlimited Medicare assures all SS beneficaries receive in excess of contributions. Adjusting Benefits to Price-Indexing, rather than current Wage-Indexing, will adversely affect long-run Consumption patterns. Solution: Establish One-rate Set amount of monthly Benefit which is Wage-Indexed, place an yearly maximum on Medicare contribution to health expenses, and stipulate that FICA taxation is taxation which is unlimited as to amount of Income taxed with no additional Benefits accurring from added contribution.

Feldstein's worst solution may be Health Accounts. Health Underwriters would raise the Deductible and Co-Payments to absorb all Health Account funding at about 14% Profits ratio, without braking Health Care Cost increases. Solution: Adopt a basic policy Universal Health Care system to handle basic medical costs (see Previous Post) significantly cheaper than current payment through Tax levies at all three levels of Government, where Additional-Care policies could be purchased by the better off.

Feldstein makes much of the disincentives of social insurance programs (Translation: Americans will not take subsistence Jobs because of the social insurance, therefore more immigrants have to be imported). Answer: Remove the incentive of Business tax credits which allow below-Living Wage expensing of Labor.
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Manner of elimination of below-Living Wage Expensing of Labor:
1) Order the Bureau of Statistics to determine the Living Wage cost of labor per Product item.
2) Businesses which cannot prove their Labor Costs equaled the Living Wage Cost for their level of Production, will be faced with an inverse Tax credit (added Tax liability to the Mystified equal to the difference).
3) Accepted Labor expensing will consist Wages, Salaries, Pension benefits, Profit-sharing based on percentage of Salary or Wage, and Health benefit costs; but will not include Stock Options, Stock Grants, Paid Insurance policies or Annuties, or Housing subsidies.
4) Such Labor expensing requirements will be required of all Labor expensing for Tax purposes, if the Product is sold in American markets, without consideration of location of Production. lgl