Sunday, November 24, 2013

Obamacare and the Future of Healthcare and Social Security

One of the most peculiar paradoxes of our economic system is that we have created a form of capitalism in which companies are almost compelled by law to maximize their profit. One of the obvious components of a profit-maximizing strategy is the need to minimize labor costs: hire as few workers as possible, and pay them as little as possible. At the same time we fell into a mode where companies were expected to provide workers with a pension plan and access to healthcare—rather expensive responsibilities.

Placing these responsibilities on businesses made no logical sense—and no economic sense either. While workers who have these benefits surely appreciate them, they also must recognize that their very existence is both a benefit and a constraint. People with good healthcare plans and/or a significant accumulation of pension benefits often find themselves trapped into staying with their current job even though moving to another might provide them a better long-term situation. This "job lock" would be eased if retirement and healthcare benefits were portable through national systems.

Employers are gradually finagling their way out of the pension responsibility; first by switching to defined contribution plans (401(k)s) from defined benefit plans to provide well-defined and limited costs to them; and subsequently by decreasing the employer contribution to near zero. What most workers are left with is a tax-exempt savings plan and the responsibility to do their own saving and financial planning. The result is an anticipated disaster as people head into retirement with little more than Social Security to live on.

Companies are getting out of the pension business with no path available to transition to a national system.

What is interesting about Obamacare is that it has built into it a path to a national system. The key component is the array of healthcare exchanges that are being set up to cover workers who aren’t captured by Medicaid or an employer plan. Once the system has demonstrated that it works, it should be viable to expand the number of people covered indefinitely. It might be even more economically efficient if the number of participants is allowed to grow.

Employers are demonstrating that, similar to pension plans, they want to limit their responsibility to provide healthcare benefits. An article in Bloomberg Businessweek by Peter Coy suggests employers like the idea of exchanges so much that they are beginning to offload their employees to private exchanges—the equivalent of moving from defined benefit pensions to defined contribution plans.

"Where companies don’t have the option of sending workers to government-operated exchanges, they’re directing them to private insurance exchanges. These, like the government-sponsored exchanges, are essentially websites where people can choose from a variety of private insurance policies. Employers cover part of the premiums. The private exchanges aren’t part of Obamacare, but "a lot of employers are going to use the air cover of the ACA to potentially pull back on the role that they play" in employees’ health insurance, says Todd Van Tol, a partner in the health and life-sciences practice at management consulting firm Oliver Wyman."

Coy also presents the example of Trader Joe’s which plans to send its part time employees to the federal exchanges because it is a better deal for the workers.

"Trader Joe’s, the supermarket chain, said in September it would end health benefits next year for part-time workers. Employees will get a $500 payment and be sent to the public exchanges. With the federal tax credits available there, most workers will get a better deal than the company could offer, it said."

Obamacare currently limits who is eligible for coverage through the exchanges. If the systems are successful, one could gradually change the requirements so that more workers become eligible.

And why not eventually make everyone eligible?

The costs of this process will probably require a defined contribution from employers in order to be economically feasible. Companies should be willing to make that contribution in order to eliminate the expense that is associated with administering their current programs. Also, innovation should be encouraged as business start-ups encounter a much simpler, and probably much cheaper, environment in which to work.

Employees should benefit from being freed from the uncertainty about healthcare coverage. They can leave an unsatisfactory work environment freed of the worry of losing medical benefits. A worker can become self-employed or start a new business without facing the complications of the current system.

The equivalent pathway to a national pension system could involve expansion of the Social Security System as it is now configured in order to provide greater benefits. Also, it could incorporate a separate benefit that would essentially be equivalent to a national 401(k) plan. A number of suggestions have been made as to how to proceed along such a path. Developing a national system seems quite feasible. A discussion of these approaches is provided in Moving to a National Retirement Plan.

The economic benefits of a national retirement system parallel those discussed with respect to healthcare.

It is time to get serious about these issues.

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