Tuesday, December 30, 2014

SSDI Solutions Initiative Not Interested In Private/Market Solutions to Disability Insurance Disaster!

Update: The McCrery-Pomeroy conference was held and they recently posted their results here.  As I suspected/feared this was a banal affair. Improvements in the system, if any, will be minor/incremental. What a waste of human effort and life!
I received the following from the SSDI folks over the Christmas break:
Dear Dr. Wright, 

Thank you again for your interest in the SSDI Solutions Initiative. We reviewed all the proposals carefully and we regret to inform you that the Co-Chairs have not selected your proposal.

We received a large number of high quality proposals competing for very limited resources. While the Initiative thought your ideas were very promising, the highly competitive selection process forced us to make hard choices. We encourage you, however, to publish your ideas through other venues. The SSDI program is in critical need of reform and your contribution could help make a difference. 

We hope you will consider getting involved in the SSDI Solutions Initiative through other activities. For instance, we may be publishing shorter policy briefs in our website to help disseminate reform ideas and we will be reaching out to disability experts to serve as peer reviewers. Please let us know if you would be interested in either of these opportunities.

Project staff 
In the spirit of publishing my ideas "through other venues," I copy my proposal (and its addendum below) and will let readers decide what is really going on here. Of course I think that these folks aren't really interested in economic/practical solutions but rather in political ones. It is Fubarnomics all over again!

McCrery-Pomeroy SSDI Solutions Initiative
Proposal Submission Form

Author Name(s): Robert E. Wright
Institutional Affiliation(s): Augustana College SD
Proposed Paper Title: Mutual Security: Disability Insurance By, and For, the Masses
Email Address(es): Robert.wright@augie.edu
Phone Number(s):605-274-5312
Mailing Address: 2001 South Summit Ave./Sioux Falls, SD 57197
Do you have an employer or sponsor that is willing to compensate you for your time on this paper?                                                                                                                                                                        Yes                        No
If your employer or sponsor would like to be recognized for its contribution, what name should be used (or write “n/a”)?  Augustana College SD
If you will require a stipend to complete this project, how much will you require? Pro bono

The SSDI Solutions Initiative reserves the following rights: It may accept or reject any proposal or paper according to the selection criteria outlined in the call for papers. It may make any editorial changes it deems necessary to make a paper suitable for publication or to avoid infringing third-party rights or law. It may refuse to proceed with publication of any paper for any reason.
Neither selection of a proposal nor publication of a paper implies or reflects endorsement of that proposal or paper by the SSDI Solutions Initiative, its co-chairs, members of its advisory council, or any affiliated organizations.
Neither the SSDI Solutions Initiative nor any affiliated organization discriminates on the basis of race, creed, color, ethnicity, national origin, religion, sex, sexual orientation, gender expression, age, height, weight, disability status, veteran status, military obligations, or marital status.

Mutual Security: Disability Insurance By, and For, the Masses

Historical Background:
In the 1910s and 1920s, America’s insurers created a system of “private security” that included income insurance for people who died or became unable to work prior to accruing sufficient assets to retire. The unprecedented depth and length of the Great Depression effectively destroyed the disability insurance segment of that system by inducing an increase in disability claims larger than insurers had believed possible. The Social Security system moved into the resulting vacuum and to this day provides most “any occ” disability insurance, which defines disability as an inability to work at any job, while a few private insurers provide more extensive and expensive “own occ” disability policies, which define disability as an inability to work in one’s chosen occupation.

The Case for Privatization:
The Social Security Disability Insurance (SSDI) system has long been beset by the types of problems endemic to large government programs (cf. Peter H. Schuck, Why Government Fails So Often and How It Can Do Better [2014]). Moreover, no compelling economic reason why disability insurance needs to be provided by the government has been shown. Disability insurance certainly is not a public good as the private system worked well until the Great Depression and the high-end, private part of the market today functions as well as can be expected given the constraints placed upon it. Tellingly, the government also insinuated itself into the life insurance market by providing Social Security beneficiaries with a death benefit but wisely allowed its influence to dissipate by not raising the benefit level as inflation eroded it away.

Privatizing the Mutual Way:
Critics of the re-privatization of disability insurance fear that premiums will increase, as will the percentage of Americans without coverage. If the policy mistakes made in health insurance during and after the Great Depression (through employers and via joint-stock/publicly-traded insurers) are repeated, such a dire outcome could certainly transpire. I propose, instead, that disability insurance be offered directly to individuals and only by mutual insurers. Policyholders, not stockholders, own mutual insurers, which have a long history of providing a wide range of quality, low-cost life, casualty, and other insurances. The success of mutual insurance is rooted in incentives: mutual managers do not have to make quarterly numbers to please distant investors, so they can concentrate on long-term projects aimed at helping the insurer’s customers/owners.

Government’s Roles:
First, current SSDI recipients should continue to receive the benefits promised them and pending claims should be processed under the current (or improved) guidelines. As those claims are determined and recipients return to the workforce, transition to other programs (like OASI), or pass away, SSDI will slowly fade away, allowing natural attrition to shrink its workforce without major disruptions. Second, if disability insurance is too expensive, the government should reduce regulatory costs for insurers and encourage new entry and allow the subsequent increase in competition to reduce premiums. If necessary, it should establish and pay the start up costs of additional mutual insurers. Third, the government will also have to create some mechanism for ensuring that Americans purchase adequate disability insurance coverage. A compliance system linked to taxes or the healthcare mandate may be the most cost-effective method. Finally, the government may want to subsidize premiums for low income individuals.

By mutualizing the provision of disability insurance, the government will no longer be in the expensive business of “improving the disability determination process, modernizing determination criteria and program eligibility, strengthening program integrity and management” and so forth because it will have essentially outsourced those problems not just to insurers but, via mutualization, to the insureds themselves. The wisest public policies do not directly solve problems but rather create environments conducive for individuals or businesses to mitigate them.
October 29, 2014 
Dear Mr. Wright,

Thank you once again for submitting a proposal to the McCrery-Pomeroy SSDI Solutions Initiative. We are giving every potential author the opportunity to submit a one-page addendum to their proposal. The purpose of this addendum is to complement the initial submission with any additional information that authors consider relevant and to allow an opportunity to clarify questions raised by the project staff about the proposal. If you choose to submit an addendum, we ask that you please consider addressing the following questions, though you are not required to do so: 

1. Do you think the private insurance industry is currently equipped for such a shift and, if not, will you address what will be necessary to get them there in your paper? 
2. Given the dramatic change proposed, will the paper include a discussion on any proposed interim steps towards the new system?
3. Will you address the potential distributional implications of a move from public to private insurance?

In case you write an addendum, you do not need to answer the individual questions one by one. It would be preferable if you could address these questions in your narrative. We request that you submit the short addendum by next Wednesday November 5th or let us know if you need additional time. 

Project staff

McCrery-Pomeroy SSDI Solutions Initiative – Invited Addendum to Wright’s Mutual Security Proposal

The mutual insurance industry is only partially prepared at present for the proposed shift. It certainly has the general expertise but of course it does not currently have the capacity because the government effectively monopolizes the large, low end of the market. The paper will outline discussions with mutual insurers regarding an appropriate implementation timeline and phase-in strategy. 

Consumers, too, will need time to adjust, as will universities, like the University of Pennsylvania, that offer professional insurance-related instruction. The paper will include summaries of discussions with the latter about phase-in but due to budget limitations can offer only general guidelines based on secondary research about how to approach the former, who, generally speaking, have little knowledge of disability insurance (public, private, or mutual) at present. For example, replacing stock market-based curricula with insurance-based education in primary and second schools may prove helpful as everyone needs disability insurance but relatively few people need to trade individual stocks.

The distributional implications of a move to mutual disability insurance will be discussed, but they are difficult to parse because it is not clear what the market will look like given the complex regulatory environment, hence the suggestion in the “Government’s Roles” section that the government should be prepared to subsidize premiums for lower income Americans, especially at first. Of course regulations can change over time, especially when a large or powerful constituency, like a mutual insurer with millions of policyholders, desires reforms. Moreover, markets generally supply consumers with more options than government programs do, so some Americans will opt for disability policies that are more costly than SSDI but that provide them with a more individualized fit given their risk perceptions and preferences. That means that, although we must presume that Americans would not knowingly render themselves less well off, the distributional implications of privatization (specifically in this case mutualization) will be difficult to discern even ex post.

Finally, it is difficult to predict what mutualization may bring in terms of future business innovation. Some economists, for example, believe that life, health, and disability insurance will be most efficiently (and hence inexpensively) offered in a single insurance policy. So even if mutualization proves regressive in the short-term, it may lead to innovations that will prove progressive in the longer term.

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