The US government and benefits' systems is in need of serious reform. But how far has this situation gone? Paul Robertson talks to David John to find out.
The United States is often thought of being something of a laggard when it comes to state benefits, and therefore a paradise for health and protection insurers. Yet it turns out that the truth is that the US system has a wealth of benefits, though many are in dire need of reform and PMI insurers have similar difficulties to their European colleagues.
In the UK as a guest of Friends Provident, David John, a quiet, thoughtful man, is senior research fellow at The Heritage Foundation, a well known Washington think tank. A former adviser to Senator John McCain, he provides regular advice to Congress on Life Insurance and Financial Services. He also advises President Obama’s administration on financial services’ issues.
Three strands
He explains there are three strands to the US social security system: retirement, disability and Medicare. Separate to this is another medical assist programme Medicaid. Medicare qualification starts at 65, from that age it takes care of the vast majority of the nation’s healthcare needs. Most people will also have a transitional policy from their working life that will pick up any of the deductables – excesses – from Medicare.
Medicaid, on the other hand, is a federally funded and usually state administered scheme, where people qualify for certain treatments. For the most part, these are lower income people. Medicaid uses general revenue money that is sent to the State. The State must then come up with a portion as well.
“This is highly controversial as different states have chosen to add things to Medicaid, although all must meet a certain standard,” says John. “For example Maryland adds a lot, and in times like these, this adds a terrible drain to state finances. Typically, it is the more liberal states that add these extras.
“There is a situation in the South and mid west where because these are poor states, Medicaid is eating a significant portion of the state budget.”
John explains that in each spending programme there is a need to qualify, but once you have, the benefits are automatically paid and no funds need to be allocated each year.
“If you look at the spending graphs for the 75-year horizon, they continually rise then level off. The only reason they level is because economists realised if they continued with the current projection they would consume the entire US economy. So, operating under the theory that something that is unsustainable won’t be, they decided to level off the graph.”
He adds: “If you look at the proportion of these schemes plans, by 2052 they take every dollar of tax revenue.”
The majority will not qualify for any state medical assistance and so will have private medical insurance (PMI). The vast majority of Americans get healthcare through their employer. John says; “This can mean a situation where the policy covers almost everything, to others with a high deductable or something along those lines. The majority of policies last one year, so as you renew, typically premiums increase, and medical inflation greatly outstrips all other inflation.”
This has caused sustainability problems: “Every year companies are telling employees ‘we can’t cover this anymore’ or ‘we need to increase the deductable’. This is typical.”
“Something needs to be done and everyone recognises this. If you look across the political spectrum, you will find hundreds of solutions – none of which are terribly practical because the entire system is horribly complex and layered with politics. One problem now is that the tax advantages from schemes go to the employees’ company. That means that although I have a deductable as an individual, I have no stake in the price.”
So there are considerable problems in the medical sector. But what of protection insurance? For disability, the US Government offers Social Security Disability Insurance (SSDI), part of the Federal insurance. The fund is actually called Old Age, Survivors and Disability Insurance. Again, there are problems.
Huge Backlogs
“It is administered by the States and it is terribly difficult to qualify,” says John. “It is harder in some places than others but there are huge backlogs of people turned down once who appeal again. In addition, the US is divided into different judicial districts and we have law suits in the various circuit courts. These have made individual and differing decisions. So we have qualification in one place but not a few miles away.
“We have attempted to get to a reasonable national system. However, this will take years for the backlog alone. Given that situation – and I have known of people qualifying after they had actually died – most Americans have insurance. Again, this is normally handled through the employee benefits’ system.
“In addition to life insurance for instance, I could receive disability payments of full salary for three months and then 75% salary from then on. Usually this is for a stated period of years during which it is assumed that you will apply and be approved by SSDI. It may be that the company policy will continue to top up SSDI. SSDI is based on your earnings’ history. Social security for retirement purposes requires 35 years employment history, but for SSDI there is a sliding scale based on age so many younger people may only have a top-up policy.”
Social security takes the highest 35 years’ earnings, indexing them up until 60 for wage growth. However, social security taxes are levelled on the first dollar of income up until around £106,000. So for benefit purposes only that income is counted, so Donald Trump, for example, will be taken as earning £102,000 on which to base a claims magnitude. It works out to about 40% of the pre-claim wages for the average income earner.
Fragmented system
A theme running through the interview is that the system is fragmented, with individual states controlling both State and Federal budgets. John is particularly scathing when it comes to regulation. Given recent history, this is unsurprising.
He says: “The key problem in the US is that it is based at state level, with varying levels of control. We have 50 states so for a new product a company may need 50 approvals. When I recently bought more life insurance, I went online to a firm in Denver, and was sold a policy from a firm in New York. I live in West Virginia, and the medical details were handled in Maryland. If there is a problem, who do I talk to? The answer is, West Virginia is my only option but they can do little about a situation.
“We are looking at recommendations to completely revise US financial regulation. One likely thing, which the insurance industry desperately wants, is the Federal Charter which will allow one national regulator. If you look at the housing debacle, there were several regulators who raised alarms. “However, because there was not a single regulator, they were ignored.
“We will end up with an effective national regulator being phased in soon. I forsee the future will be the FSA model of a mixture of principles and rules. No regulator is perfect, it is always a case of learning from the last war and projecting the lessons forward.”
You get the feeling John and his fellow policy experts have their work cut out.
