America’s competitive, deregulated economy needs a safety net to match

America spends more on social benefits that Denmark, says Jacob Hacker. The difference is that the retirement pensions and healthcare benefits many Americans rely on are funded through tax breaks and employer contributions rather than the welfare state — welfare comes as an employee benefit rather than as a right of citizenship. Spending on private benefits amounts to almost a tenth of the nation’s economy, says Hacker. But despite this high level of spending, the system in trouble:

In the last generation, corporations have trimmed and restructured benefits, shifting more and more risk and cost onto workers.

Employers once championed private benefits as an alternative to overbearing public programs. The editors of Life magazine described them in 1949 as "ransom devices to buy off the welfare state." Today, however, the workplace welfare system that once stood as a shining beacon of America’s singular path looks more like a dimming light on a failed byway.

Large employers like General Motors are spending billions on benefits. The Washington Post’s George Will observed "the cost of providing health coverage for 1.1 million GM workers, retirees and dependents is estimated to be $5.6 billion this year." Will says that one of the reasons General Motors stock price has fallen so drastically is because the company has become a welfare state.

In the New York Times Paul Krugman argued that "If the United States had national health insurance, GM would be in much better shape than it is." GM spends around $1,500 per car on health benefits. And according to Krugman Americans "spend far more per person on medical care than countries with national health insurance, while getting worse results."

So what should American do with its overloaded and outdated benefits system? Naturally not everyone agrees, but according to Hacker, "The essential first step is to shore up existing policies to ensure broad-based and secure unemployment, pension and health benefits". But just shoring up the old programs won’t be enough. In an interview with BusinessWeek’s Lee Walczak, Jacob Hacker outlined his ideas for a new system of social protection.

Q: What would a more appropriate safety net look like?
A: In my research, I have shown that there has been a pretty significant increase in the variability of family income — up and down. These big losses aren’t adequately taken care of by our existing system of social protection. As President Bush himself has noted, that system was shaped in a world when men were the primary breadwinners, unemployment swings were short and cyclical, not long and structural, and people worked for a long time for one employer and had generally stable employment and family lives.

We now live in a much more vibrant, competitive, deregulated economy, one that’s buffeted by the winds of global change, and a lot of these protections have not evolved to meet that new environment. The conservatives’ critique that a lot of our institutions have not evolved is absolutely right. They just have the prescription backward.

Q: How so?
A: For them, the idea is that if you’re in a more competitive and uncertain economy, you should also have a more decentralized and individual-based system of savings and responsibility. I think you have to encourage all sorts of individual savings, but you also have to provide workers with a basic form of insurance protection that is very flexible, follows people from job to job, and covers big risks.

Q: And how would you do that?
A: My idea is to create a kind of catastrophic insurance plan that could be administrated by the private system but be heavily regulated by the federal government. This would look a lot like the stop-loss coverage that employers get against liability, health-care costs, and other big risks to their income, but would be for families.

That insurance would be coupled with all sorts of enhanced savings vehicles to give lower- and moderate-income people an opportunity to do better on their own. The recent debate over bankruptcy legislation indicated that there’s a need for this. Roughly 43% of bankruptcies are due to health-care costs, and two-thirds are due to the triumvirate of health costs, loss of employment, or divorce.

We need a universal savings account that would be available to citizens for schooling, purchase of a first home, education, and health-care costs and retirement. The amounts would be matched, based on income, by employers.

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Andrew Leigh
15 years ago

Don, Hacker’s statement is essentially meaningless. “Social spending” is generally taken to mean spending by government. I don’t think we learn much by redefining it to mean “spending on stuff that other countries do via the government”.

15 years ago

I haven’t read the Hacker article, but I take the gist to mean that the US is spending large amounts in areas traditionally seen as ‘social’ or ‘welfare’ expenditure, but that due to the nature of the spending (ie. private, individual based) they fail to realise the positive outcomes of a wider welfare base.

Don Arthur
Don Arthur
15 years ago

Andrew – That’s a fair point.

If you were doing a comparison would you allow ‘tax expenditures’ to count as ‘social spending’?