By Ann Henkener
Over the years, many services at the federal level have been partially privatized, including the military, tax collection, transportation and the postal service. In 2011, two areas were singled out in new proposals for privatization: Medicare and Social Security. Medicare and Social Security are large areas of expenditures by the federal government, topped only by defense spending. Both Medicare and Social Security are considered non-discretionary spending, i.e., the benefits provided by the programs determine their costs, rather than the legislature appropriating a fixed amount. Medicare has been partially privatized since its inception, with services being provided, for the most part, by private providers and payment processing being performed by private companies. Both have been the subject of proposals to privatize either portions or all of the programs.
One of many proposed federal plans for privatizing is the current federal budget plan proposed by the Republicans in the U.S. House of Representatives and sponsored by Rep. Paul Ryan. This plan includes a proposal to privatize Medicare. It would require future Medicare recipients to use a premium support provided by the federal government to buy a private insurance policy instead of receiving current benefits directly funded by the federal government. The proposal, introduced by Rep. Ryan on April 5, 2011 is called “The Path to Prosperity”1 (hereafter, Path) and is based on a plan Rep. Ryan released in April 2010, “A Roadmap to American’s Future”2 (hereafter, Roadmap). “The Path to Prosperity” includes the proposal to privatize Medicare.
“The Path to Prosperity” doesn’t contain a specific proposal to privatize Social Security. However, Rep. Ryan set out some specifics in “A Roadmap for America’s Future,” proposing to privatize a portion of Social Security by creating individual accounts for beneficiaries and permitting the beneficiaries to invest a part of the money.
Medicare currently provides a defined benefit program of health care services, financed by tax dollars. In essence, the federal government determines the benefits and self-insures the Medicare program. Recipients select the provider of services. If the recipient needs one of the benefits under the program, the federal government pays the provider of the services for the amount covered by Medicare and the recipient pays a deductible or a co-pay for some services.
The plan to privatize Medicare set out in “The Path to Prosperity” would apply only to individuals under age 55. Those 55 and older would continue to be eligible for, and receive, current benefits when they reach age 65. For those covered by the proposed plan at age 65 when the individual is eligible for Medicare, the plan would provide a health care benefit similar to the current Medicare prescription drug program. A covered individual would choose an insurance plan from a number of available options offered by private insurance companies. Medicare would pay a premium support payment to the insurance company chosen by the beneficiary, thus subsidizing its costs. The premium support payment would not necessarily cover the entire cost of the insurance. The amount would be based initially on total current Medicare spending and would be indexed to grow each year. However, it would not be indexed to the rate of growth of health care. Insurance would be available from governmentally regulated insurance “exchanges” and could be purchased from insurance providers in any state. Low-income individuals would be eligible for additional premium support. [Path at 44-47; Congressional Budget Office (hereafter, CBO) at 7-9.]
The CBO analyzed the impact of the Medicare proposal in “The Path to Prosperity” on spending for health care by Medicare beneficiaries. They found that currently, on average, Medicare Parts A, B and D paid for approximately 76 percent of the cost of services covered by Medicare, with the individual paying the balance in out-of-pocket expenditures such as premiums for Parts B and D and in co-pays and deductibles. Thus, the beneficiary would be paying approximately 24 percent of the cost of services. The CBO estimated that if the law were not changed, the beneficiary would be paying about 25 percent of the cost of services in 2030. However, under the plan proposed in “The Path to Prosperity”, the beneficiary would pay 68 percent of the cost of currently covered services and the premium support payment would pay 32 percent of the currently covered services. (CBO at 21) In part, this would be because both administrative costs and profits would be higher in a private plan, and payment rates to providers are higher for private plans than for Medicare. They estimated that utilization would be less because private health insurers would probably impose greater utilization management than occurs in Medicare and increased cost sharing with beneficiaries would encourage lower utilization. In addition, premium support payments would increase with increases in the consumer price index for all urban consumers (CPI-U). Historically, increases in health insurance have outpaced increases in the CPI-U. (CBO at 23-24)
The privatization plan in “The Path to Prosperity” provides a way for the federal government to contain the costs of the Medicare program by allowing the federal government to set the amount it will pay for premium support and allowing the insurance providers to determine the benefits provided, subject to certain minimum requirements.
Social Security is funded through a payroll tax, and current payroll taxes are used to fund current benefits. Benefits are determined by the federal government and include retirement and disability benefits, and benefits to survivors if a worker dies. Because it is a blend of a retirement plan and a social insurance program, benefits may not be entirely proportionate to contributions. Social Security accounts are not the property of the beneficiary.
“A Roadmap for America’s Future” contains a plan to privatize Social Security. That plan would give workers under age 55 an option of investing about a third of their Social Security taxes in personal retirement accounts. It would guarantee that the account would never be less than the amount placed into the account plus inflation. The account would belong to the individual and could be inherited. Individuals would invest a portion of their contributions in a limited number of funds managed by the federal government. That portion would increase over time to a maximum of 5.2 percent of the current 12.4 percent Social Security payroll tax. Retirement age would very gradually rise to age 70, instead of age 67. In addition, a one-time payment of $2 billion would be required to assure continued benefits to those over age 55 and others not participating in the privatization plan.
Privatization would shift the risk of an increase or decline in the value of investments to the beneficiary. It would not necessarily fund the social insurance programs providing for disability insurance and survivors insurance. It would require a large “transition cost” to pay benefits to beneficiaries under the current plan. Those benefits are now paid for by current wage earners. Under privatization, money contributed by a current wage earner would go directly into that wage earner’s individual plan. Privatization would also permit individuals to make decisions about their retirement funds and benefit from increased value in their investments. It could open up new funds for investment in the economy because additional money would be going into the stock market.
Ann Henkener (LWVOH) is a member of the LWVEF Study Committee on Privatization of Government Services, Assets and Functions.
Produced by the Privatization of Government Services, Assets and Functions Study, 2012
© League of Women Voters
Budget, (Path) Available at: http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf
2. Ryan, P. (2010, January) A Roadmap for America’s Future, Version 2.0, (Roadmap)
Congressional Budget Office (2011, April) Letter to Hon. Paul Ryan. (CBO) Available at: