Wednesday, November 26, 2014

OECD: United States is first in private social spending

November 2014
Social spending is falling in some countries, but in many others it
remains at historically high levels

In 2014, OECD countries devote more than one-fifth of their economic
resources to public social support.

Countries on average spent more on cash benefits (12.3% of GDP) than on
social and health services (8.6% of GDP).

Cash income support to the working age population accounts for 4.4% GDP
on average across the OECD, of which 1% GDP towards unemployment
benefits, 1.8% on disability/sickness benefits, 1.3% on family cash
benefits and another 0.4% on other social policy cash supports.

Public expenditure on health is another important social policy area. On
average across the OECD, public expenditure on health has increased from
4% in 1980 to 6% of GDP.

In terms of spending, public pension payments constitute the largest
social policy area with spending at just below 8% of GDP.

In the United States public social spending is relatively low, but total
social spending is the second highest in the world

Thus far, the discussion focussed on public social spending on cash
benefits and social and health services, and in the United States and
other non-European OECD countries such spending is lower than in most
European countries. However, a focus on public budgets misses two
important features that affect social spending totals and international
comparisons of social expenditure: 1) private social expenditure and 2)
the impact of tax systems.

Private social expenditure

Private social expenditure concerns social benefits delivered through
the private sector (not transfers between individuals) which involve an
element of compulsion and/or inter-personal redistribution, for example
through the pooling of contributions and risk sharing in terms of health
and longevity. Pensions constitute an important part of both public and
private social expenditure. Private pension payments can derive from
mandatory and voluntary employer-based (sometimes occupational and
industry wide) programmes (e.g. in the Netherlands or the United
Kingdom), or tax-supported individual pension plans (e.g., individual
retirement accounts in the United States).

Individual out-of-pocket spending on health services is not regarded as
social spending, but many private health insurance plans across the OECD
involve pooling of contributions and risk sharing across the insured
population. On average across the OECD, such private social health
expenditure amounted to 0.6% of GDP in 2012. It was 1.5% of GDP in
France and 2.5% of GDP in Chile, but across OECD countries private
health insurance is most important in the United States where it
amounted to 5.7% of GDP. Taken together with public spending on health
amounting to 8% of GDP in the same year, and the value of revenue
foregone on tax breaks on health premiums (just over 0.5% of GDP), total
social health spending in the United States amounted to over 14% of GDP
- 4 percentage points higher than in France which is the second biggest
"health spender" among OECD countries.

Private social spending plays the most important role in the United
States where it amounted to almost 11% of GDP.

Cross-country rankings

The combination of small "net tax effects" and considerable private
social spending ensures that Australia, Canada, Japan and in particular
the United States move up the international social spending ladder. As
private social spending (including health) is so much larger in the
United States compared with other countries, its inclusion moves the
United States from 23rd in the ranking of the gross public social
spending to 2nd place when comparing net total social spending across


Comment by Don McCanne

The character of a nation is determined by support of its social
programs. Medicare and Social Security are two social insurance programs
that are revered by U.S. citizens. Yet those programs, combined with
other public social programs, leave us ranked only 23rd amongst OCED
nations. It is our unique private social spending programs that move us
from 23rd to 2nd place.

At almost 11% of our GDP, private social spending was by far the highest
in the United States, as compared to other nations. Contributing to this
are our private pension plans (5% of GDP) and especially spending on
private health insurance (5.7% of GDP). In fact, our total public and
private social spending on health care (private insurance @ 5.7%, public
spending @ 8%, and tax breaks on health premiums @ 0.5%) amount to 14%
of GDP, making us by far the biggest health spender of all nations.

Is it wise for us to rely so heavily on private social spending? First
of all, administration of private retirement accounts is much more
expensive and complex than administration of our Social Security system,
and administration of private health insurance plans is also much more
expensive and complex than is administration of Medicare. We are wasting
private social funds on these inefficient intermediaries.

But more than that, as a percentage of income, contributions to private
retirement accounts and private health insurance are regressive. For
comparable benefits, lower-income individuals pay a higher percentage of
their incomes for private pensions and private health insurance than do
higher-income individuals. The fact that we rely much more heavily on
private social spending demonstrates how inegalitarian the United States
has become, in contrast to other nations.

Imagine folding the benefits of individual retirement accounts into
Social Security and folding the benefits of private health insurance
plans into Medicare, and then fund both programs with equitable
progressive taxes. We would have the finest retirement and health
programs in the world.

Tomorrow - Thanksgiving - we can give thanks for having the wisdom to do
that as a nation (or did I get something wrong here?).

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