Lawrence A. Hunter

The public debate about Personal Retirement Accounts has been clouded by a smokescreen of false arguments from critics, and by a confusing array of options from reformers. Everything, it seems, is "on the table," except true Social Security reform based on personal accounts.

In an attempt to bring clarity and guidance to the debate, the Institute for Policy Innovation (IPI) submits these Design Principles for Social Security reform.

Establishing personal retirement accounts creates no net new cost to the Social Security system. The act of refinancing and formalizing the $12 trillion liability is incorrectly interpreted as a “transition cost.” It is simply the part of the unfunded debt obligation that must be covered from sources other than current workers’ FICA contributions. Refinancing enables an eventual elimination of the liability. Alexander Hamilton performed a similar feat during the early days of the Republic.

Everyone should know by now that Medicare suffers dramatic long-term deficits and unfunded liabilities, and is in need of fundamental, structural reforms. But effectively refusing to pay the doctors and hospitals that provide the medical care the program promises to seniors is no way to solve that problem.

Rather than stifling regulatory competition by centralizing regulation, insurance companies should be allowed to choose between an optional federal charter and mutual recognition among state regulators. Such expansion would create a 21st century regulatory system in which they can be globally competitive and better serve the American consumer.

Comments directed to the White Paper dated August 28, 2007 from the NAIC Personal Lines Market Regulatory Framework (EX) Working Group. These comments are directed primarily to two aspects of the White Paper that are particularly problematic:  its treatment of rate regulation, in general, as somehow different in kind (and function) from price controls; and its specific recommendations to the Property and Casualty Working Group.

The entire edifice of insurance regulation by state governments is a leftover from the New Deal. Since World War II, in virtually every industry other than insurance, this type of regulatory control has been replaced by more realistic, market-based mechanisms. The recent attempts by the State of Florida to regulate insurance prices demonstrate the compelling need to modernize today’s dysfunctional state insurance regulatory system.

The problems of insurance industry regulation merit the review currently underway at the Treasury Department. The review should concentrate on identifying the most critical problems these industries face as a consequence of government action (or inaction), and target a few discrete initiatives, such as regulatory competition, that should set the political process on a straight road to reducing those problems.

Natural disasters exposed serious flaws in the way we manage risk, including bread-and-butter items like homeowner's insurance. Regulatory power split between the states and Washington poses a challenge to reforming insurance regulation for the benefit of consumers and the US as global competitor.

Increasing competition among regulators is a promising idea, and one approach is an optional federal charter that would let insurers register with Washington rather than the state capitol. Another approach being tried out is for forward-looking states to contract with each other and regulate for economic efficiency and consumer welfare, not political grandstanding. These two ideas could also interact in a very productive way, and will get careful scrutiny in the months ahead.

The total Social Security trust fund surplus would immediately fund 3.2 percent personal retirement accounts, stopping the spending raid on the trust fund and starting the personal accounts so broadly supported by the public. This would begin to solve Social Security’s unfunded liability problem while leaving the door open to a future extension of the accounts or other steps necessary for a comprehensive solution.