Sometimes a little-known law can reshape our economy and our personal lives. One such law was Section 401(k) of the 1978 tax law. The headlines that year went to the law's sharp reduction in capital gains taxation, which indeed had important effects -- including sparking the venture capital sector that financed the high-tech revolution. But 401(k) had a similarly important effect.
Employees were allowed to contribute tax-free income to individual retirement accounts, and employers could match their contributions. At the time, most private pensions were defined-benefit plans -- the employer promised to pay certain amounts on retirement. Section 401(k), when implemented by regulations in the early 1980s, led to the proliferation of defined-contribution pensions.
Defined-benefit plans tied employees to their employers for long periods and left the value of their pensions subject to risk if the employer defaulted -- just ask retired steel company and airline workers. Defined-contribution plans allow employees to take their pension money with them when they change jobs and to manage their funds themselves.
The result: a more flexible, agile labor force and a citizenry less dependent on large institutions over which they had little control and more able to fend for themselves.
Bush administration officials and some conservative thinkers hope that health savings accounts can change health care finance in a way similar to the way Section 401(k) changed pensions. Health savings accounts allow holders of health insurance policies to retain monies they do not spend. Typically, such policies have high deductibles. Policyholders pay for routine and predictable medical expenses out of their own pockets, but they are insured against catastrophic expenses.
The Medicare/prescription drug law of 2003 contained provisions allowing health savings accounts -- one reason the Bush administration and most congressional Republicans supported it. Now the administration wants to strengthen HSAs by making premiums on these policies tax-deductible.
This is an attempt to reverse the effect of the World War II decision to make health insurance policies deductible to employers and tax-free to employees. This tended to tie health insurance to employment and has made individuals dependent on large organizations. Since third parties pick up the tab for most health care spending, consumers tend not to be cost-conscious, and the result has been above-inflation cost increases for health care.
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