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Abstract
Many nations are seeking to reform their welfare states so that costs to the government can be reduced and the quality of outcomes improved. In this paper we show how mandatory savings accounts can be established in order to turn a publicly funded welfare system into one that relies more heavily on individuals funding welfare payments out of their own accounts. To our knowledge, showing how a tax and welfare reform can be jointly designed to enable this transition to occur in a way that minimizes any effect on the current disposable incomes of workers has not been done before. The paper takes a new unified approach to the funding of health, retirement and risk-cover, using New Zealand as a case study. Our proposed reform relieves the fiscal pressures which an ageing population is forecast to place on the government budget in the coming decades.
Acknowledgement
We wish to thank Doug Andrews, Vince Ashworth, Richard Baldwin, Michael Bassett, Andrew Coleman, Greg Dwyer, Loraine Hawkins, Peter Holle, Larry Kotlikoff, Peter Nielson, Stefan Olson, Brogan Powlesland, Riko Stevens, seminar participants at the NZ Treasury, Imperial College London, NZ Association of Economists’ conference held at AUT in 2018, as well as two anonymous referees, for helpful comments and suggestions.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 See ‘Health at a Glance’, OECD Indicators (Citation2011).
2 See OECD (Citation2013a).
3 This phenomenon has been referred to as the ‘Cost-Disease-Effect’, as outlined by Baumol (Citation2012).
4 See Kenneth Arrow's (Citation2016) Stigler Centre Blog, at the University of Chicago's Booth School of Business, 15 March, 2016.
5 Private health-care expenditures accounted for 65 per cent of total national health expense in Singapore in 2008.
6 The Legatum index measures a country's ‘basic physical and mental health, health infrastructure and preventative care’. The Bloomberg Global Health Index grades nations based on variables ‘including life expectancy while imposing penalties on risks such as tobacco use and obesity. It also takes into consideration environmental factors including access to clean water and sanitation’. Singapore operates the world's second most efficient system, according to Bloomberg's Health-care Efficiency Index (Citation2018). Meanwhile, the country was ranked as having the 6th best health-care system out of 191 nations by the World Health Organization in 2000 (the last time WHO conducted such a study). Other World Health Organization (Citation2000) rankings included France at 1st, US at 37th, United Kingdom at 18th and New Zealand at 41st.
7 See Affordable Excellence: The Singapore Health-care Story by Haseltine (Citation2013).
8 Some of our new regime's features are similar to the Singaporean system. Other aspects, like the establishment of an individual risk-cover account for events like unemployment, and the retention of a tax-financed state pension, differ markedly.
9 See Statistics NZ Census (Citation2013) and UK Government Statistics (Citation2018). The transfers included in the NZ figures are ‘unemployment benefits, sickness benefits, domestic purposes benefits, invalids benefit, student allowances and other government benefits, payments or pensions’. For more details on the UK figures, see https://www.ethnicity-facts-figures.service.gov.uk/work-pay-and-benefits/benefits/state-support/latest.
10 Whereas ‘disposable income’ is usually defined as being net of taxes and transfers, for the purposes of this paper we define it as being net of taxes, transfers and contributions to one's mandatory savings accounts.
11 The US, UK and NZ figures are for 2018 (see OECD, Citation2019) and Singapore's figure is for 2016 (see World Health Organization, Global Health Expenditure Database, Citation2018).
12 See Social Determinants of Health: the Solid Facts, R. Wilkinson and M. Marmot, eds., 2nd edition, World Health Organization.
13 The OECD (Citation2013a) considers two scenarios for predicting future public health spending: a ‘cost-pressure scenario’ in which growth in expenditures unrelated to demographics or income is assumed to continue at the same average rate as in the past; and a ‘cost-containment scenario’ in which policy actions are assumed to make the spending drift fade away (from 1.7% to 0% in 2060).
14 Under the alternative ‘cost-containment’ scenario, it is forecast to double, to above 5% of GDP.
15 Since employer payments for health insurance are tax-deductible for employers but not taxed to employees, current US tax rules encourage employees to want their compensation to include comprehensive ‘first dollar’ insurance. Brot-Goldberg, Chandra, Handel, and Kolstad (Citation2017) provide evidence which shows how health insurance plans without deductibles dramatically pushes up health-care spending.
16 See OECD (Citation2019).
17 This scheme was made compulsory for all Singaporeans in 2015, with opt outs no longer being allowed. See Ministry of Health, Singapore: https://www.moh.gov.sg/medishield-life/medishield-life-faqs#TopFaq
18 Between 1973 and 1979 the annual increase in real per capita total health-care expenditures was 7.9 per cent. In 1981 total health spending in Singapore was 2.5 per cent of GDP and rose to 3.5 per cent of GDP by 1986. In the aftermath of the reforms, health-care spending fell to 3 percent of GDP by 1995. See Meng-Kin (Citation1998).
19 See Gadiel and Sammut (Citation2014) who argue that ‘it may be unwise for Australia to borrow a model found simply to work in Singapore's unique social and city-state geographical setting’ (pg 16). Dong (Citation2006) describes how some of the ideas behind medical savings accounts have been used in Shanghai but their effectiveness has not been emulated. Barr (Citation2001) states that ‘the heart of the Singapore system of health funding, with its financial discipline, is government control of inputs and outputs and strict rationing of health services according to wealth’.
20 See Di Tella and MacCulloch (Citation2002a).
21 See Alesina and Giuliano (Citation2015).
23 See, for example, Reeves, McKee, Basu, and Stuckler (Citation2014) and Pierson (Citation1994). By comparison, Di Tella and MacCulloch (Citation2002b) find that the per capita generosity of unemployment insurance programmes is frequently cut when the level of unemployment is high.
24 How inter-generational tensions are resolved under differing political systems is a little researched topic.
25 Sanderson and Sherbov (Citation2015) argue that there are preferable alternatives to the dependency ratio for measuring important aspects of population aging. For example, they compute the ratio of people not participating in the labour force to those who are participating and show that the dependency ratio is often a poor approximation to that ratio. Another preferred measure which they advocate is based on comparing the net value of all transfers to and from people. Because people can simultaneously be receivers and also providers of transfers (via the taxes which they pay) Sanderson and Sherbov (Citation2015) define financial dependency on the basis of net transfers.
26 See United Nations (Citation2013).
27 For example, Robert Shiller notes that
with so many more old people in coming decades, governments will be hard pressed to raise enough money to pay for their needs by taxing the young. None of this is news. But that is the point: despite the vast attention currently paid to the looming old-age crisis, household saving rates have been falling in most of the world's rich countries. (see Project Syndicate, Citation2004).
28 It dropped from around 9 percent in the 1980s to approximately 5 percent in the 1990s and to almost zero in the first years of the new century (see Guidolin & La Jeunesse, Citation2007). On the other hand, an ‘excess’ of desired saving over investment, mainly coming from China, is argued to be causing the net inflow of foreign savings into the US (see Bernanke, Citation2005, Citation2015).
29 See Choi, Laibson, Madrian, and Metrick (Citation2002) and Thaler and Sunstein (Citation2003).
31 See OECD (Citation2009).
32 See Douglas and Callan (Citation1987).
33 See Maddison (Citation2001) for GDP per capita rankings. Evans, Grimes, Wilkinson, and Teece (Citation1996) summarize the reforms.
34 See Executive Summary of the New Zealand 2015 Budget by the Minister of Finance, Hon. Bill English.
35 Total Kiwi-Saver assets were $28.5 billion in 2015. The savings are privately managed in funds chosen by each individual. See the Financial Markets Authority (NZ) (Citation2015).
36 See ‘History of tertiary education reforms in NZ’ by Ron Crawford, Productivity Commission, Research Note, 2016/1, January, 2016.
37 See also Bell (Citation2012).
38 The NZ Treasury's (Citation2012) projection for health spending is similar to the OECD's ‘cost-containment’ scenario. Under their alternative ‘cost-pressure’ scenario, health spending in NZ is expected to increase to 15.3% of GDP by 2060.
39 See Coleman (Citation2011b).
40 The total cost of these programmes, administered by the Ministry of Business, Innovation and Employment, was $1.35 billion in 2015. See ‘Estimates of Appropriations 2015/16 - Economic Development and Infrastructure Sector’, B5, vol.1, NZ Treasury (Citation2015e). Some of these programmes are also referred to as ‘industrial policies’ in the economics literature.
41 This cut-off is chosen since it is close to average earnings. Our proposed reform is designed to help all workers establish significant personal savings, however assistance stops at $50,000 for single tax-payers. Note that the higher threshold for those with dependent children introduces a risk of discrimination in the labour market due to the differential employer contributions across these groups. If higher income earners wish to spend additional funds on their welfare needs, above what is held in their mandatory accounts, then it is paid out of their own pockets.
42 Note that although total taxation falls, the rise in GST implies some people may pay more taxes (to the extent that their higher GST payments are not compensated by lower personal income taxes).
43 The issue of how savings in the accounts should be invested is somewhat beyond the scope of this paper. Reducing management fees has been a focus of the recent literature on this topic. For example, Kotlikoff (Citation2008) blames ‘exorbitant’ pension fund fees for undermining the past reforms in Chile due to the ‘influence that bankers, insurance companies, brokers, investment companies, and other players in the financial sector have on government policy. Once the subject of personal accounts comes up, they each want a piece of the action’. He argues that a global index fund that is free of fees should be used. The Singaporeans took the approach of establishing the Central Provident Fund to invest mandatory savings, which is run by a statutory board operating under the Ministry of Manpower. In the Australian context, Morris (Citation2018) highlights the extent to which the financial services industry there has extracted rents from pensioners, following the introduction of compulsory individual retirement accounts in 1992. Contributions to the Australian accounts are mandatory for employers and voluntary, although tax deductible, for employees.
44 This safety net may come at a cost of undermining work incentives, due to increasing marginal effective tax rates. On the other hand, the new funding paid into the savings accounts of workers leads to a build-up of wealth, providing a greater incentive to be employed.
45 In addition to a government-run (catastrophic) health insurance scheme, private insurance would also be offered if people wished to supplement their (required) basic coverage. However, the number and type of private schemes would likely require tight regulation, along Singaporean lines. Although we have not provided details of the institutional design in the present paper, the aim would be to avoid the failures of the US private insurance market, where over-consumption of care by patients and over-delivery of services by doctors is common, as neither group is incentivized to keep costs in check. Public schemes are regarded in the economics literature as being necessary, in particular, due to adverse selection problems in private insurance markets which can leave many people without coverage. In the case of unemployment insurance, private markets are seldom observed. Two recent papers on this topic are Hendren (Citation2013) and Hendren (Citation2017).
46 In practice, this levy, as well as a proportion of the other $8.1 billion public funding of health-care, may be paid into a fund, similar to the MediFund account in Singapore, from which it would be dispersed.
47 See Case, Lubotsky, and Paxson (Citation2002) and Marmot (Citation1999). Interestingly, Case, Lee, and Paxson (Citation2008) argue ‘that the adoption of a Canadian-style universal health insurance program in the US would do nothing to reduce the differences in health status between poor and rich children’.
48 Whereas the Singapore government spent 2.0% of GDP on health in 2014, our budget allows for public spending of 3.4% in the 2015–16 year (=$8.1b/ $239.5b).
49 Under the new system of individual retirement accounts, the government would no longer need to make contributions to its own ‘Cullen Superannuation Fund’. The existing balance in the Cullen Fund could be retained for its current purpose of helping to pre-fund future government superannuation payments.
50 Note that for the (mandatory) private superannuation scheme that exists in Australia, the preservation age at which one can access one's fund, whether one chooses to remain in the work-force or not, remains at 65 years old.
51 The Working-for-Families budget totalled $2.4 billion in the 2015–16 year.
52 See OECD (Citation2011) and OECD (Citation2014b).
53 However, due to the long time horizon, these calculations are very sensitive to the interest rate. If the rate is assumed to be 2% per annum then the amount would only be $359,000, whereas if the interest rate is 5% then it is $822,000.
54 See Statistics NZ (Citation2018).
55 Note that national savings may not necessarily increase to the extent that private voluntary dissaving crowds out the additional compulsory savings. Indeed, Australia, which does mandate contributions to superannuation funds, had a level of gross household debt relative to disposable income of 190% in 2018, high relative to many other advanced economies (see Reserve Bank of Australia, Citation2018). On the other hand, Connelly and Kholer (Citation2004) find evidence that only part of compulsory superannuation contributions have been offset by reductions in voluntary saving (see also Gruen & Soding, Citation2011).
56 A complete set of long-term forecast government accounts is available upon request. Our budgetary comparisons of the present system and the new mandatory savings system assume that total GDP and per capita health-care expenditures grow at 3.5% under both regimes. See Buckle and Cruickshank (Citation2012) for some alternative fiscal forecasts.
57 Haveman (Citation1994) also discusses the pros and cons of generational accounting methods.
1 This figure applies to more than 1 million New Zealanders. It varies around this base for nearly another 1 million.