The Changing Social Contract

This is a bit hurried, but here's more on social insurance and the changing social contract:

America's welfare dilemma, by Dan Roberts, Financial Times: Few gulfs between the US and Europe run deeper than their approach to insuring people against life's vicissitudes. One side of the Atlantic clings to the notion of a welfare state - if not the cradle-to-grave version beloved of postwar socialists, then at least one where governments mandate some form of universal healthcare and pension provision. In the US, meanwhile, the more basic social security and medical safety net provided by the government is dwarfed by generous health and retirement benefits offered by large employers - a voluntary paternalism long ago dubbed "welfare capitalism".

Both models lend themselves to easy caricature. ... Yet in truth, the challenges facing rich economies are remarkably similar. Ageing populations and rising medical costs are straining twentieth-century welfare systems to their limit. Just as Europe's social model is creaking under the weight of German unemployment or the runaway budget of Britain's National Health Service, so the US model is being tested to destruction in industries such as carmaking and airlines...

Employees, too, are realising the limitations of relying on one source for both their salary and welfare insurance. The shortfall in many corporate pension funds has left some US workers doubly penalised when their companies go bankrupt. Other companies are choosing to shift much of the risk from uncontrollable costs back to employees, either by switching from guaranteed pensions towards defined-contribution saving schemes or by encouraging individual responsibility for health insurance though high deductions on claims and flexible health savings accounts. ...

If welfare capitalism is dying away, what will replace it - a more self-reliant individualism or creeping state intervention? The irony of the second scenario is not lost on those who study the history of US corporate benefits. Since American Express launched the first employer-provided retirement plan in 1875, through the Great Depression and the postwar boom, part of the reason the business community has been willing to provide such benefits was to guard against the dread accretion of big government. "Employers had reasons for doing this other than paternalism," says Sanford Jacoby, a UCLA management professor who wrote a book on welfare capitalism. "One reason schemes were more elaborate than in Europe was companies wanted to avoid the creeping social insurance." ...

Signs that employers are reconsidering their unwritten social contract with Americans are everywhere. Last week, IBM ... announced it would freeze this defined-benefit scheme  ... A similar sharing of burdens is taking place in healthcare. Many of the newer health insurance plans offer greater flexibility to employees. As with defined-contribution pensions, employers are encouraging people to open health savings accounts that put patients in charge of their own spending but can leave them with nasty surprises if the money runs out. Yet supporters of this so-called "consumer-driven healthcare" movement argue it is overly simplistic to say this is just about saving money or shifting risk. ...

Certainly, the days when employers would simply pick up every medical bill are nearly gone. Only 28 per cent of US employees worked at businesses offering health plans that require no employee contribution in 2003, compared with 35 per cent in 1998 ... A still bigger problem lies with companies that offer no health cover at all. Since 2000, the number of Americans without health coverage has increased by 6m to reach 45.8m, according to the US Census Bureau - an increase many attribute to a decline in employer- sponsored coverage. ...

For this reason, pressure is growing for legislation to force large employers to spend at least 8 per cent of their payroll on health insurance or pay the rest toward a state-run scheme. Business groups fear that could be the thin end of the wedge in allowing states to dictate how they offer benefits. The union-backed campaign hopes this year to introduce bills in 20 state legislatures, the first of which may come in Maryland, where it is aimed mainly at Wal-Mart. The legislation - which may pass as early as today ...

John Sweeney, president of the AFL-CIO umbrella group, argues: "It is nothing short of immoral that big, rich companies are shirking their responsibilities." But in spite of the heated partisan language, replacing the old model of welfare is something both ends of the political spectrum are beginning to worry about. With the number of Americans aged over 65 set to more than double from 35m in 2000 to 81m by 2050, few can ignore the issue.

"All countries rely on a mix of insurance provided by individuals, employers, insurers and governments," says Prof Jacoby. "In the US, there has traditionally been a relatively large role provided by companies. The real difficulties [in the new model] will arise for those employees who are unable to afford health insurance or save for their retirement. This in turn may put pressure on governments. It would be back to the future."...

The decline of welfare capitalism in the US has yet to prompt a broad public backlash ... So far, the strongest response has come from affected workers... Mr Bush's failure last year to reform Social Security, the federal pension programme, serves as a reminder of how politically charged such important economic programmes are. But ... "Republicans are hearing from their friends in business." Mr Nichols says he has been called in to talk to two Republicans considering bids for the 2008 presidential nomination. He declines to name them but says one asked for advice on how he could discuss universal coverage in a way that was consistent with Republican principles such as low taxation and limiting the size of government. The second asked about what Mr Nichols calls the "moral case" for healthcare....

Politicians, employers, employees and activists with a range of views - from those who favour universal health coverage to backers of individual health savings accounts - have begun to communicate. "There are people talking to each other on this issue who wouldn't have returned each other's phone calls eight years ago," he says.

Opinion polls suggest most Americans believe the government has some responsibility to ensure that everyone has healthcare coverage. But most also favour maintaining the current system, based mostly on private insurance. A lesson Mr Nichols learnt during the Clinton era is similar to one Mr Bush learnt last year during the Social Security debate: such big steps cannot be pushed through with narrow majorities. As Mr Nichols says: "It is going to have to be truly from the centre, with bipartisan support."...