The Ownership Society and Its Discontents

You can't count on George Bush and the GOP Congress to transform the welfare state.

Ryan H. Sager from the November 2006 issue

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The expense of all this is tremendous. Not only is the government crowding out private insurance that individuals were paying for themselves, but it has to write checks to corporations to discourage them from dropping retirees’ drug coverage and leaving the federal government to pick up the tab. In 2003, the Congressional Budget Office said the drug benefit would cost $400 billion over 10 years, and the White House accepted that number. The president’s first budget after the bill was signed bumped that number up to $511 billion. But neither of those numbers was a real 10-year figure; both counted two years, 2004 and 2005, when the new benefit wouldn’t be on line yet. The real 10-year cost, from 2006 to 2015, is closer to $1.2 trillion.

Administration officials estimate that various forms of savings will bring that closer to $720 billion. With Medicare, however, it has never been a good idea to accept the more modest cost estimates. While there’s been some early evidence of cost savings from drug plans competing against one another, it’s unlikely to make a serious dent in the program’s cost. And even going with the most modest of estimates, the prescription-drug benefit will increase the financial burden of Medicare by roughly a third, bringing its expenditures up from 2.6 percent of gross domestic product in 2003 to 3.4 percent in 2006. As 78 million baby boomers head toward retirement and Medicare eligibility, things will only get much, much worse.

All of this seemed like a high price to pay for HSAs. But it would be a mistake to underestimate just how radical a reform HSAs represent. “They were the first market-based health care reform really in over 60 years,” says Michael Cannon, director of health policy studies at the libertarian Cato Institute.

An HSA is essentially a 401(k), but for medical expenses instead of retirement savings. Individuals and their employers can make tax-free contributions. But unlike a 401(k), funds withdrawn to pay for medical expenses before age 65 are never taxed. HSAs can be set up only in conjunction with qualifying high-deductible health insurance (so that catastrophic expenses will be covered). They allow younger and healthier workers to save money on premiums while building up assets they can tap when they’re older and need more health care; this encourages HSA owners to be more price-conscious when tending to their everyday health-care needs.

HSAs became available under the new law at the beginning of 2004. Interest in them gained momentum quickly. In the first 15 months they were available, 1 million people had purchased the high-deductible health insurance to qualify for opening the accounts; in the next 10 months, another 2 million people signed up. What’s more, HSAs seem to be fulfilling their purpose of making health care affordable to the uninsured and containing costs. According to separate estimates from the health company Assurant and the trade group America’s Health Insurance Plans, which represents some 1,300 insurance providers, as many as 40 percent of HSA applicants were previously uninsured. A survey from Deloitte Consulting shows that the cost of consumer-driven health plans, such as HSAs and less flexible health reimbursement arrangements, increased by only 2.8 percent from 2004 to 2005, as opposed to an average of 7.3 percent for all other types of plans.

Building on this success, Bush in his 2006 State of the Union Address proposed expanding the amount of money individuals can put in HSAs and making them more accessible to individuals and employees of small businesses. His prescription-drug plan, one of the signature “accomplishments” of his first term and a key campaign issue in 2002 and 2004? He didn’t even mention it.

On the political side of things, there can be little doubt that the prescription-drug bill has been a disaster. A Gallup poll taken the month the bill was passed found that 73 percent of seniors thought the benefit wouldn’t go far enough. Once the benefit’s implementation got underway in January 2006, anger over the bill heated up even more as seniors came into contact with its complex machinery and hostile news stories flooded the media. As the midterm campaign season got underway, it was clear that the Democrats would use the prescription-drug plan as a weapon going into November, harping on its alleged stinginess, its complexity, and the Bush administration’s refusal to allow Americans to buy price-controlled prescription drugs from Canada and Europe.

With the bill giving Republicans so little political benefit, all that’s left is the question of whether it was a wise policy tradeoff. Grace-Marie Turner, president of the Galen Institute, a pro-market health care think tank, says she is absolutely certain HSAs could never have been passed any other way. “I cannot believe the naiveté of those who ask why couldn’t we have just passed HSAs on their own,” she says.

One such naive soul is Cato’s Michael Cannon—though he has a bit more than wide-eyed innocence behind his assertion that HSAs could have been won another way. He thinks HSAs could easily have been added to a tax or budget bill. In particular, he points to a Senate roll call vote in 2001 that showed that support for lifting the restrictions on Medical Savings Accounts (the forerunners of HSAs) was only a few votes short of a majority—and the 2002 elections resulted in the net gain of one new HSA supporter. “You had two stinking votes to get, you could have bought that for less than $400 billion,” says Cannon. But since HSAs were more of an afterthought designed to keep free-marketeers in line than a central part of the president’s agenda, there never was a push to pass them on their own.

Whatever your view of such hypotheticals, one of the corroding effects of the Ownership Society was clearly on display in the process that brought about the Medicare bill: its underlying assumption that the growth of government can never be stopped, or even slowed. In the third year of Bush’s presidency, with the Republicans having just reestablished control of the Senate and increased their margin in the House, those underlying assumptions expanded to include not just that government will stay the same size, not just that it will get bigger, but that it will explode catastrophically no matter who’s in power—and there’s nothing anyone can do about it, so it might as well be Republicans doing the exploding.

Owning Retirement

If the 2003 Medicare bill was wildly cynical and crassly political, it needs to be said that Bush’s advocacy of Social Security privatization over the years has been consistent, principled, and, yes, even bold—if not always well-articulated.

While Bush, Rove, and other Republican strategists see Social Security reform as part of a larger plan to—how to put this gently?—destroy the Democratic Party, the president has also long understood that the federal retirement system is unsustainable in its current form, short of massive tax hikes or benefit cuts. Rebel in Chief author Barnes traces Bush’s advocacy of private accounts back to his first, unsuccessful campaign for Congress in 1978. During that race in West Texas, Bush told a group of realtors at the Midland Country Club that “the ideal option would be for Social Security to be made sound and people be given the chance to invest the money the way they feel.” The issue wasn’t a big one in the campaign, but the idea would remain the same 22 years later.

Bush hit Social Security privatization hard during the 2000 campaign, and Al Gore and his allies hit back even harder. In the presidential debates, Gore labeled Bush’s plan “Social Security minus” and said that Bush would cut benefits and leave seniors eating cat food. The AARP and the labor unions spent millions on phone banks, mailings, and ads. There were even recorded calls by Ed Asner made to scare old folks out of their homes and into the voting booth. But ultimately, Bush had the politics of the issue right. In exit polls, 57 percent of voters said they supported Bush’s vision of private accounts—including one-third of those who’d voted for Al “Lock Box” Gore. In Florida, seniors split fairly evenly between Bush and Gore. Social Security was no longer the third rail of American politics. The new president might not have mustered the momentum for reform, but he demonstrated that it was no longer suicidal to try.

Once in office, Bush appointed a commission, chaired by the late Sen. Daniel Patrick Moynihan (D-N.Y.) and AOL/Time Warner COO Richard Parsons, to consider how to “modernize” Social Security. The panel was heavily tilted toward privatization proponents, but it had the unique disadvantage of releasing its final report on December 11, 2001, when the nation was in no mood to worry about an issue that fell well short of life or death. The prospects for private accounts just got worse in the spring and summer of 2002, as the names Enron, Ken Lay, and WorldCom became late-night punchlines and the stock market sank to five-year lows. Reform was off the table for the rest of Bush’s first term.