America Sick of its Welfare State

Perhaps the fiscal cliff will only be a hill, but the negotiations between Republicans and Democrats will do little to solve the U.S.’s number one problem: health care funding, which is justly presented as the main fiscal issue in the coming years. Rising medical costs also affect the private sector.

Total healthcare spending represents 17 percent of GDP. 49 percent of that goes to public financing (Medicare, Medicaid, Children Health Insurance Program), and 51 percent to private (essentially private insurance and uncovered individuals).

When we talk about public health, we usually think of Medicare, because it is the only exclusively federal program. The other programs are supported by the states, even if they increasingly depend on funds from Washington.

In the U.S., healthcare is part of compulsory public spending. It is a right (entitlement), which is difficult to attack without incurring the anger of practitioners, Democrats, and even tea party members. However, the cost of funding health care is rising 2 percent faster than GDP. When we are talking about the aging population, changing technologies, malpractice, and excessive consultations, this rise is unsustainable.

For these reasons, the portion of public spending devoted to healthcare will rise considerably over the next few years. Today, federal healthcare spending (Medicare plus co-funding Children Health Insurance Program and Medicaid) represents a little less than 5.5 percent of GDP. By 2025, it should reach 7.5 percent.

Rising healthcare costs pose an enormous problem for public finance. The rise of the welfare state in the U.S. occurred in a slightly schizophrenic context. Democrats, such as Roosevelt and Johnson, refused to link public social problems (aging, illness, unemployment) with higher taxes.

For Molly Michelmore, “The policies combined a marked ambivalence toward the welfare state and a strong defense of the individual rights of taxpayers.” * It is for this reason ¬– as we observe in Europe –that social programs were funded by indirect taxes on wages (the payroll tax) and presented as insurance premiums rather than public transfers. The tax was “regressive,” since beyond a certain threshold, wages were not taxed.

For Meyer and Anderson, “Only those with very low earnings pay the tax on their entire wages. Additionally, workers who have already paid taxes up to the taxable wage base with one employer in a calendar year must pay again if they change jobs or moonlight. Thus, those who lose a job or work additional hours at a second job are also more likely to pay taxes on a higher fraction of earnings.”

Added to all of this is rising inequality: The threshold of taxable income has not risen proportionally with the working base due to growing gaps between high and low salaries. This is a serious problem for the system’s long-term financial stability, which could lead to higher taxes.

That is not all: Not only is this a funding burden for businesses, but private insurance premiums are also soaring. Asset protection is effectively paid for by businesses and through tax deductions, or tax expenditures. Only self-employed workers pay their premiums directly – often at a prohibitive price, which explains why over 40 million Americans are not currently insured. Obamacare was designed to lower this number.

Considered a key part of employee compensation (“offsets” include salary as well as public and private social contributions), raising private insurance premiums will further increase the cost of running a business and compress wage earners. Unfortunately, in a competitive environment and in a sector such as services, where productivity gains are limited, workers pay the price.

As observed above, employer contributions to private health insurance represent an increasingly important figure. Because employer contributions have recently hit their lowest historic level – as a share of GDP – employees take on more of the burden.

Finally, the chart hides one other reality: The increase in the number of employers who are not taking (or are only partially taking) responsibility for employee healthcare. These employers are exempt from furnishing certain benefits, allowing them to potentially contain employee costs (over $10 less than costs in France and Germany, according to the OECD) but also to cut the spending power of their workers.

America is aging, and it will be expensive. Even if the Obama plan provides for universal coverage (though it “forgets” to offer, for example, public health insurance among the options available to households), the part of the plan that concerns spending and cost control remains particularly unclear.

Not only does this ambiguity hurt public finance, it also burdens businesses. This results in further squeezing of American wage earners.

* Exact quote unable to be sourced online