Arnold Kling  

Insurance or Mass Delusion?

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Robert Solow writes,


It is plausible that a state-run universal social insurance system would be better able than a private company to detect and prevent exploitation of the system by malingerers. Maybe success would depend on the creation of a norm of good citizenship; something like that underlies the establishment of social insurance in the first place. It seems to work in the Nordic countries--though not without strain--where the tradition of social insurance is strongest. The US has a long way to go.

Solow mentions the usual problems with insurance--moral hazard and adverse selection. However, I believe that there is another problem that is much more important--mass delusion.

Thanks to Mark Thoma for the pointer.

For example, with health insurance, people believe that what is unaffordable individually is affordable collectively. Uwe Reinhardt writes,


no one should not be lulled into a false sense of security by the idea that, equipped with a tax credit of $5,000 for a family, American families can procure adequate protection for themselves from the financial inroads of ill health merely by topping off the tax credit with an additional $800.

Reinhardt notes that the average family of four consumes over $15,000 per year in health services. So it seems silly of Senator McCain to suggest that a $5000 tax credit is sufficient.

Except...how do we manage to spend $15,000 per family if we cannot afford it? We have the delusion that corporations and Medicare pay for our health care. But we pay for it. If corporations did not pay for health care, the typical worker might have another $10,000 a year or more in take-home pay. That could be used for health insurance--or for something else, if workers choose. And with Medicare--guess what? We pay for that, too.

The main function of health insurance is not to provide insurance. Insurance would mean catastrophic coverage. The main function of health insurance is to maintain the delusion that health services are free. The main beneficiaries are health care providers, who have the demand for their services boosted by the illusion of no cost, even as they charge for their services. (Individually, doctors may hate insurance companies and think that the insurance companies drive down their incomes. But collectively, without the demand boosted by insurance, many medical practices would be out of business.)

Defined-benefit pension plans are a mass delusion. The promise to pay a specific pension, regardless of circumstances, is unsustainable. Solow implies that companies are moving away from defined-benefit plans because companies have become nastier. In fact, as the period of retirement lengthens and becomes more uncertain, defined-benefit plans are very likely to blow up.

Government is the only institution that can promise a defined-benefit plan. But are government plans a mass delusion? I suspect that they are. Certainly, if you include Medicare, we know that as currently structured it will not exist 20 years from now.

Solow says that a welfare state can be sustained by encouraging "good citizenship" and a work ethic. Yet all of the good social cues don't seem to stop the retirement age from falling, even as longevity goes up. I would not count on the Nordic social welfare system to remain in place forever.


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CATEGORIES: Social Security



COMMENTS (8 to date)
dWj writes:

I would like to see social security means tested: if the expenses associated with social security exceed the reasonable means to pay for it, benefits automatically go down, probably offering new retirees the option of taking it as a deferment of retirement or a smaller pay check. In any case, over periods of time when consumption will more or less have to line up with production, it seems silly to suggest that the people doing the production would bear all the risk associated with the economy not growing as well as hoped; instead we promise, no matter what the costs, that we are going to take care of healthcare (however that's defined), retirement, and so on.

I think of it as a great big, economy-wide CDO. There are two significant differences from most CDOs from Wall Street, though: 1) demographics are causing the super-senior attachment point to ratchet down, levering up the equity tranches more and more, and 2) by and large, the people doing the production that underlies the whole structure are being paid solely in equity claims on it.

One thing it has in common with Wall Street CDOs: the super senior claims, at issue, are rated AAA. For now.

Dan Weber writes:

If corporations did not pay for health care, the typical worker might have another $10,000 a year or more in take-home pay.

You know that progressives don't believe this for a second, right?

If corporations didn't have to spend $10,000 on employee health care, it would all go to the CEO to spend on crack.

I'm not saying they're right. It's just that you're spitting into the wind if you expect that argument to work on at least a third of the population.

Michelle writes:

Dan Weber, you are so right - take it from a Canadian! We all believe that "free" health care is our absolute right, but we can't understand why *everything* is more expensive in Canada, (we suspect it's something to do with greedy business people, or perhaps a government conspiracy!)productivity is lower, and wages are on average lower, in spite of higher minimum wage.

We pay for it every moment of every day! Can't talk about it here though, it's the third rail.

No free lunches.

Max writes:

In Germany, we have a doctor visit fee of 10 euro, which must be paid if you want to visit a doctor (once a quarter). This was done to remind people that doctor services (even justi a visit) cost money.

The problem with this solution is the amount of extra work the doctor has to do. Also, he either needs a connection to a bank and/or a safe for exchange money. This clearly caused the organizational trouble to rise not fall and ultimately are 10 dollar the market price for a medical chek-up visit?

Methinks writes:

If corporations did not pay for health care, the typical worker might have another $10,000 a year or more in take-home pay.

Yes. To spend on health insurance.

Just imagine how much more workers will have in take-home pay if employers didn't have to pay employment taxes. That's much more fun to think about.

Krankenversicherung writes:

Excelent post. Very informativ. Best regards

floccina writes:

A delusion; I was once talking to guy about SS and he said if it were not for SS most people would not be able to afford to take care of their parents in their old age. I was stunned. I of course asked “who do you think is paying to take care of them now”.

Maybe success would depend on the creation of a norm of good citizenship; something like that underlies the establishment of social insurance in the first place. It seems to work in the Nordic countries--though not without strain

When I was in college I got a job doing the grounds keeping at the University. It was a state University and so it was a state job. The employees often spent all day driving around in trucks hiding from the bosses (they got gasoline at the Universities own gas pumps). People often punched other people in and out etc. It was incredible. From this experience I learned that corruption in Government is not limited to taking bribes and stealing but must also include not working hard. In Tyler Cowen's book he tells us how often the Scandinavians skip work. So I wonder about Nordic work ethic.

Ajay writes:

For the reality of Nordic society, I suggest people see what somebody actually from there has to say, not what some outsider like Solow, who is presumably uninterested in actually looking into the reality of these social systems, says:

http://www.reason.tv/video/show/508.html

I find that among the professional class the people who support moving towards socialism work in the sort of jobs where they are highly specialized on one particular process and do not have much contact with business or wider society. While they may have great knowledge of isolated subjects like engineering or literature, they are almost entirely economically ignorant but that does not stop them from making misguided statements about society that have huge economic consequences. The professionals who have wider experiences or some conception of business/economics invariably skew conservative or libertarian. I suspect that economists like Solow or Krugman or Samuelson are extreme examples of such highly-specialized, economically ignorant babies, capable of existing in academia while being largely ignorant of what they speak only because they have highly specialized in some particular, most likely useless, abstruse academic niche, while mostly being ignorant of the wider economic topics on which they feel compelled to speak, such as health care or social security.

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