Social Security reform: implications of Medicare

One of the positive aspects of the debate on Social Security reform is the focus that it places on return on the investment that employees and employers make in their future income. As an employer, I write a check each month to the Federal Government for Medicare and Social Security, and no-one ever reports back to me what is done with the money, what return is earned on it, what benefit the beneficiaries have accrued from it, etc. So a by-product of reform might be more transparency in reporting, and the ability to compare yields on the funds taken by Social Security to the yields earned in the market.

All this is well and good. However, there is an implication for the potential privatization of the Social Security system that may be drawn from the (current) mixed (private/public) health care system. Healthcare, readers will remember, is often paid for by employers. One potentially valuable unintended consequence of the employer-funded system is that employers take a keen interest in the cost and benefits that their payments yield, resulting in benefit innovation and cost control. However, because of the fragmented nature of the system, there are often competing benefit offerings (such as access to government programs, Medicaid, etc.). Competition between private and public offerings to large numbers of the same people gives those beneficiaries the opportunity to select against the system, choosing the package or benefit that is most attractive.

As Social Security is reformed, we want to avoid the possibility of large numbers of beneficiaries being able to move between a private and a public system, to the potential detriment of both.