Why We Should Reform Medicare and Social Security in the Next Few Years

For what reasons do we have Social Security/Medicare?

There is no reason why, in a society which has reached the general level of wealth ours has attained, the first kind of security should not be guaranteed to all without endangering general freedom. There are difficult questions about the precise standard which should thus be assured …. but there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody….

 

Nor is there any reason why the state should not assist the individuals in providing for these common hazards of life against which, because of their uncertainty, few individuals can make adequate provision. Where, as in the case of sickness and accident, neither the desire to avoid such calamities nor the efforts to overcome their consequences are as a rule weakened by the provision of assistance – where, in short, we deal with genuinely insurable risks – the case for the state’s helping to organize a comprehensive system of social insurance is very strong….  [T]here is no incompatibility in principle between the state’s providing greater security in this way and the preservation of individual freedom.

Friedrich A. Hayek, The Road to Serfdom, Chap. 9, “Security and Freedom.” As I understand it, Hayek argued that man’s natural state is not as an individual, but as a member of a tribe that would socialize costs and benefits. Society functions better when we surrender our tribalist instincts—but in asking people to make this sacrifice, it makes sense to replace the social safety net that tribalism provides. Hayek, Law, Legislation and Liberty, Vol. 3 (1979).

Henderson (and vince) appropriately observes that health insurance creates incentives for over-consumption (and thus, for over-charging). Henderson proposes reducing Medicare to a per-capita payment—with currently sick people getting a double portion. Presumably this would mean that the sickest 1% of people would get 2% of Medicare dollars, and the sickest 5% would get 10% of the dollars.

In 2019, 1% of the population incurred 21% of all health care spending; 5% incurred 49%. These kinds of distributions explain the need for insurance–and the inadequacy of proposals such as Henderson’s. It’s nice to imagine that if we only gave people enough financial incentives, they wouldn’t get Parkinson’s–but the data is weak.

While I agree not to cut social security benefits (except to raise the “retirement” age) I do think we should reform it by substituting a VAT for the capped wage tax that is currently earmarked for the SS trust fund.

I suspect the best thing to do in practice is to just change Medicare funding in the same way, using a VAT instead of the wage tax to fund the trust fund. Ideally, we would just fold Medicare into a more fundamental reform that eliminates the employer purchase of health insurance and Medicaid for a ACA-like system in which individuals use tax credits to pay the insurer of their choice. I guess this is approximately the system for all that you advocate just for Medicare.