From Welfare State to Social State

1
From Welfare State to Social State

• Wilfried Prewo, 2004

2
Time for Change

• Government is the problem
• Globalisation has made the German welfare state
  unsustainable, as jobs are lost to more frugal
  countries
• Now widely accepted that benefits must be cut

3
The Prewo Prescription

• The Consumer Model
• Financial empowerment and individual
  responsibility the cornerstone
• Enable individual to buy the current benefits
• Requiring purchase only of a minimum preventing
  the worst case
• Allowing savings from prudent behaviour to be
  kept

4
Consumer Model
Consumer Model Instead of being a passive recipient of a one-size-fits-all entitlement, the individual is empowered to become a discerning buyer of social security products
Social Savings Account and empowerment towards individual responsibility Contributions to social security systems are deposited in an individual Social Savings Account which is vested in the employee
Efficiency without loss of social security Minimum coverage mandatory, additional coverage optional. Free choice of providers for mandatory and optional coverage leads to an efficient supply structure
No consumption of saved premiums Savings can only be used for social security or they remain in the SSA. No inheritance tax on SSA
Institutional change instead of destruction Social security agencies can evolve into competitive suppliers of social insurance products
5
In Practice

• All current contributions put into an SSA (i.e.
  revenue neutral for state, individual and
  employer)
• SSAs corrected for current cross-subsidies (no
  loss rule)
• Individual has free choice above minimum cover
  (e.g. catastrophic risk, care about a specified
  annual sum)
• Savings can be used to buy any social security
  services

6
Questions

• Patients may Save themselves Sick!
• SSA savings/balances can only be used for social
  security forced saving. As with any system
  deductibles co-payments need careful design.
• Young and fit would underinsure
• Switching to a more generous plan later would be
  expensive as actuarial rates would be higher. But
  their SSA balances (and other assets) would
  provide a fall-back.

7
Conclusions

• An important attempt to balance empowerment and
  responsibility.
• Prewo suggests that existing system can be
  adapted rather than destroyed.
• Deals at a stroke with the political problem of
  taxi fares, spa visits and other luxuries