• Social insurance is almost always one-size-fits-all, ignoring important differences in individual needs. Social Security, for example, completely ignores other sources of retirement income and prevents seniors from using their government annuity, say, to purchase assisted living.
• Social insurance often provides benefits that are of poor quality. Many seniors, for example, pay three separate premiums to three separate health plans and yet still lack the comprehensive coverage that many nonseniors take for granted.
• Social insurance is almost never accurately priced. Because unemployment insurance premiums fail to reflect the real probability of unemployment, the program actually encourages employers to provide seasonal, rather than year-round, jobs. Because workers' compensation insurance is not accurately priced, employers face highly imperfect incentives to make their work places safer.
• Social insurance almost always creates perverse incentives. Social Security encourages early retirement. Medicare and Medicaid encourage the wasteful over-use of medical resources. Unemployment insurance is almost literally paying people not to work.
• Long term social insurance is almost never properly funded. Because of the temptation to spend payroll tax revenues that are not needed to pay social insurance benefits on other politically popular programs, social insurance is almost always operated on a pay-as-you-go basis. This has resulted in huge unfunded liabilities both in this country and abroad.
Is there an alternative to all this? Fortunately, yes. Singapore is a country that has no social security system and it has also avoided most other welfare state institutions of developed countries. Yet no one in Singapore is starving. It has the highest rate of home ownership in the world and the vast majority of people reach the retirement age with substantial assets.
How do they do it? In Singapore, people are required to save a substantial part of their income to meet basic needs. But they have considerable discretion over how the funds are invested and they have very wide discretion about how they use their savings to meet their needs.
Chile is another country that has been exceptionally innovative in liberating people from social insurance institutions. Chileans are required to save in individual retirement accounts. But once they have saved enough to purchase an annuity to provide a minimum retirement income, they have complete discretion over what they do with the remaining funds — even if they are only middle aged.
Chile also has the world’s most innovative disability insurance system and the world’s most innovative unemployment insurance system. Both systems involve substantial individual control over resources and leave individual workers with considerable freedom to make their own decisions.
Other countries around the world have been catching up. More than 30 countries have completely or partially privatized their social security systems with individually owned accounts. There is much to be learned from these experiences.