“Social Insurance” Isn’t Insurance — Nor Is Obamacare

Social Security, Medicare, and Medicaid (as revised and expanded by Obamacare) are by far the costliest forms of “social insurance” in the United States. According to estimates prepared by the Congressional Budget Office, those programs (including ancillary activities, such as insurance subsidies) will cost $3.3 trillion in 2023. However, the feds will collect only $1.6 trillion in “social insurance” taxes in 2023. That’s a $1 trillion increase in the “social insurance” deficit from its level in 2013. (Derived from Summary Table 1, Table 1-1, and Table 1-3 of “The Budget and Fiscal Outlook: Fiscal Years 2013 to 2023,” February 2013.)

I put quotation marks around “social insurance” because it isn’t insurance, for the reasons discussed in this post. What is it? Just another set of programs designed to redistribute income, mainly from those who’ve earned it to those who haven’t. “Social insurance” is a trickle-down transfer-payment scheme, wherein some of the money reaches its intended targets after passing through the sticky fingers of the overpaid bureaucrats who live in and around Washington, D.C.

What’s the difference between “social insurance” and real insurance? Insurance — to be insurance and not merely a subsidy — must have the following characteristics:

It must apply to defined, undesirable events that might befall any person or business in the insured group.

The group will be defined by specific characteristics (e.g., age range, gender, medical history, location relative to a known hazard such as forest fires).

The probability of occurrence (frequency) of a particular event can be estimated with some accuracy, for the group as a whole.

There is no way to predict the timing or frequency with which the event will befall a particular member of the group.

In exchange for a specified premium, an insurer agrees to pay each member of the group a specified amount should an insured event befall that member during a specified time period.

The insurer will periodically revise his estimate of the probability of the occurrence of various events and the costs of insuring against those those events, and may accordingly change the terms on which he offers insurance (e.g., covered events, premium, amount to be reimbursed, conditions for insurance eligibility).

Insurance should be self-sustaining. The insurer, taking into account risk and uncertainty, will strive for a situation where, in most years, premiums cover payouts plus administrative expenses and enough profit to keep the insurer from moving his capital to other, more-rewarding ventures.

But insurance cannot be sustained by force — through taxes levied on taxpayers at large to provide benefits to certain classes of persons, for example. Any such program fails to meet the criteria listed above, and is nothing more than a subsidy.

“Social insurance” isn’t insurance because it fails on all counts.

Consider Social Security. Retirement is not an undesirable event that might occur; it is a desirable event toward which almost everyone strives. Social Security is merely a government-imposed substitute for the prudent act of saving toward one’s retirement and then drawing on the accumulated nest-egg to finance that retirement. The usual excuse for Social Security is that a lot of people, especially low-income persons, can’t or won’t save enough to maintain some (arbitrary) standard of living during retirement. In other words, Social Security isn’t insurance against an unpredictable event, it’s a mechanism for subsidizing low-income and imprudent persons at the expense of their opposites.

The same analysis applies to Medicare, Medicaid, and other forms of federal and State “social insurance.” The risk pools are huge and ill-defined. The premiums are either nominal (Medicare) or non-existent (Medicaid and other programs). All such programs are nothing more than non-contractual “promises” to pay certain amounts for certain events, regardless of the probability of those events and their associated costs.

Even programs that mimic insurance — unemployment benefits and workers’ compensation, for example — are really subsidies because of their all-encompassing nature and the forcible extraction of “premiums” from employers. Those who are at risk for unemployment and on-the-job injuries have no say in the matter of how much insurance they wish to purchase and how much they are willing to pay for it. Unemployment “insurance” is an especially weird kind of “insurance,” in that the benefits expand and contract according to the whims of government actors.

Enough said about “social insurance” as insurance. It simply isn’t insurance. And thanks largely to Obamacare, health insurance is going the way of “social insurance.”

Health insurance, despite heavy regulation and the distortions produced by tax breaks, has until recently retained the characteristics of true insurance. Now comes Obamacare, the point of which is to move toward universal, government-controlled health care under the guise of “insuring” a larger fraction of Americans. What Obamacare really does, of course, is to force Americans, as consumers and taxpayers, to buy and subsidize “insurance” that covers events that aren’t health risks; for example: so-called preventive care, the use of contraceptives, abortion, various kinds of maternity and pediatric care, and the coverage of “children” up to the age of 26.

What about mandatory coverage of pre-existing conditions? Here’s Greg Mankiw on the subject:

A large part of the motivation of the Affordable Care Act is to provide insurance to those with pre-existing conditions. Under the law, insurance is offered to everyone at a price based on overall community risk, not the risk estimated by the insurance company based on a person’s particular characteristics. That has been deemed “fair” by advocates of the law.

I wonder whether advocates of this view are concerned with other insurance markets. Teenage drivers pay a lot more for auto insurance. The old pay a lot more for life insurance. Life insurance companies require health screening before granting a policy. Is this a problem, or the natural and desirable functioning of markets?

The answer to Mankiw’s question is that advocates of Obamacare aren’t really trying to insure anyone, they’re trying (successfully) to ram socialized medicine down the throats of Americans. Obamacare is a step in exactly the wrong direction. It’s an effort to emulate the long-discredited nationalized health-care systems of Canada and Britain (small sample here), complete with death panels. And sure enough, they’re already here, in Oregon.

I was prompted to write this post because I happened on a piece by Scott Gallipo, writing at The American [Pseudo-] Conservative. In a patent attempt to defend Obamacare, Gallipo begs real conservatives to “Stop Comparing Health Insurance to Car Insurance.” Gallipo’s “argument” is fatally confused; for example:

It’s helpful to step back and remind ourselves why we ask doctors to perform “preventative maintenance” on our bodies. If diseases are caught early, they’re often cheaper to treat or cure. If we stay in good physical shape, we reduce the chances of developing many diseases in the first place. When we preventatively maintain our cars, however, we are merely forestalling problems that we would have to pay out-of-pocket for anyway. If you don’t change your oil, your car insurance plan isn’t going to cover the cost of fixing a seized engine.

Gallipo is trying to distinguish preventive health care from preventive auto care, but he fails to do so. For one thing, he wrongly asserts that preventive maintenance forestalls problems that would have to be paid for out-of-pocket. Not necessarily. That’s why warranties (insurance) and their cost (premiums in disguise) are baked into the price of new autos. And that’s why many auto buyers obtain extended warranties. As it happens, I obtained my extended warranty from GEICO. It’s additional coverage under my auto policy, and it commands an additional premium And what does GEICO call my extended warranty? Mechanical breakdown coverage (i.e., insurance).

More fundamentally, Gallipo makes some heroic assumptions about preventive care. Yes, routine tests will sometimes result in the detection and treatment of conditions that would otherwise be detected at a later stage. But the cost of checkups and lab tests, when ordered wholesale by doctors because they’re “free,” far exceeds the benefits. (See this, this, this, and this, for example.)

Most fundamentally, Gallipo begs the question. In his (incorrect) view, preventive “care” on a massive scale is a “good thing.” Therefore, it should be covered by insurance. But the massive overuse of “free” checkups and lab tests has nothing to do with insurance, and everything to do with the nationalization of health care. Those “free” checkups and tests will not be paid for by risk-related premiums; they will be paid for by taxpayers and the millions of Americans whose Obamacare “premiums” are really “contributions” to an open-ended national health-care plan.

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Politics and Prosperity

“Government is a disease masquerading as its own cure.”

“Social Insurance” Isn’t Insurance — Nor Is Obamacare

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