November 8, 2004

NO RISK, NO REWARD:

THE RISK SOCIETY (James Surowiecki, 2004-11-08, The New Yorker)

Bush doesn’t get to coast for the next four years, though; he’s facing a host of economic problems, particularly the mounting cost of health care and the looming crisis in funding for Social Security and Medicare. Bush, of course, has a master plan: he intends to turn America into what he calls an ownership society.

That sounds unobjectionable—who’s against ownership? But what the President has in mind is nothing less than a radical overhaul of America’s entire system of social insurance. In place of unwieldy government programs run by busybody bureaucrats, Bush wants Americans to have more independence and more choices regarding their health care, their savings, and their retirement. Social Security would be partially privatized, with people allowed to put aside money in individual accounts. Private health-insurance plans would compete with Medicare. Tax-free retirement accounts would be expanded. And health savings accounts would let people save money for health-care expenses tax-free, as long as they agreed to sign up for plans with high deductibles. The result, Bush claimed earlier this year, would be “greater opportunity, more freedom, and more control over your own life.” And with freedom, presumably, will come greater responsibility; people will be more careful as users of health care, more diligent as savers and investors.

Fair enough. All things being equal, letting people make decisions for themselves will produce smarter outcomes, collectively, than relying on government planners. It may also promote attentiveness. As the economist Lawrence Summers has said, “No one in the history of the world has ever washed a rented car.”

No one in the history of the world has ever had a free lunch, either. The ownership society promises freedom, but at the price of a huge shift in risk, away from government and society and onto individual citizens. Social Security, Medicare, insurance—these are basically collective risk-sharing mechanisms. Rather than let each person run the risk of ending up destitute or sick, these programs pool the risk. Because the risk is shared, it can be managed, and people can be guaranteed a minimally acceptable outcome. In Bush’s brave new world, that guarantee will be eliminated.

This is what has happened as 401(k) plans have replaced traditional pension plans. With a 401(k), you have a lot more control over your financial life. You, not a pension-fund manager, decide how much to save and what to invest in. For some people, this shift has been a great boon, and it has made it easier for workers to change jobs without relinquishing retirement money. But for others (like those who staked their retirements on Enron and Pets.com) it has been a disaster. With a traditional pension, the company (or the government, in cases where the company fails) bears the burden of providing for the retirement of its employees. With a 401(k), the burden falls on the individual alone. If you screw it up, that’s your problem.


Which is why the Ownership Society won't allow too much risk taking--like owning individual stocks--and will be coupled with FBI, which strengthens the private entities that provide social services.

Posted by Orrin Judd at November 8, 2004 4:12 PM
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