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Eric J. Weiner

Eric J. Weiner

Posted: February 10, 2006 02:26 PM

The Answer for Social Security and Health Care? Safety in Numbers


If you believe the front page of Wednesday's New York Times, Democrats have finally figured out that they've completely blown the opportunity to capitalize on the public's growing disillusionment with the Bush administration's grievous mismanagement of foreign and domestic policy.

That's a shame. Because although the party's approval of Bush's Iraq boondoggle has painted it into a corner on the "War on Terror," there are very sound financial arguments for Democratic stances on key economic issues, like reforming health care and social security, that should appeal to a country hungry for new ideas.

In researching my recently published oral history of modern Wall Street I came across several lessons from the financial markets that easily could apply to our present predicament. And for the sake of politics I'll even boil these ideas down to a quick and pithy slogan that would look pretty cool on a poster or bumper sticker: "There's safety in numbers."

"Safety in numbers" is one of the central enduring lessons from Wall Street history. It's the reason portfolio theory urges investors to diversify their holdings over a broad swath of asset classes, because diversity reduces the risk of exposure if a specific market starts to collapse. And it's the reason money managers that focus on computerized passive investments, like index funds, become increasingly profitable as they gather more assets, because through technology large pools of capital can be managed just as efficiently as small pools. It doesn't matter if you have $10 million or $10 billion; your fund runs on the same computer program.

For health insurance, this safety in numbers concept means an ideal insurance portfolio spreads its risk across the broadest spectrum of people. So, in very simple terms, the risk of insuring the 50-year-old with diabetes and a family history of heart disease is offset by the 30-year-old marathon runner who never gets a cold.

Taking this idea to its logical conclusion, the broadest available spectrum of people, and therefore the least risky randomly-assigned insurance portfolio, would be the population of the United States.

Right now our multi-headed health insurance system spreads risk inefficiently across a variety of companies and plans, and coverage typically is included as part of a worker's pay package. The great failure of this private sector-based system is it doesn't remotely address need.

In the U.S., the riskiest cases - the poor and sickly - also are most likely to lack adequate health insurance because low-paying jobs often don't include health benefits and patients with pre-existing conditions can be denied coverage. So these people often don't receive the treatment they need, and when they do the costs usually fall to the government, meaning U.S. taxpayers.

Few people would call this system ideal, or even fair. But the fact is it doesn't make a lot of financial sense either. If taxpayers are going to end up covering the riskiest cases anyway, shouldn't we have a system that fully incorporates the healthiest people and spreads the risk across the broadest possible spectrum? That's the simple financial argument for national health insurance.

For Social Security, the history of Wall Street and the "safety in numbers" concept offer an even more direct lesson.

Regardless of the adjustments you make, it's generally accepted that over time investments in stocks and a host of other asset classes offer higher returns than investments in government bonds. Yet Social Security invests exclusively in government bonds, which offer safety rather than high returns. In the current economic climate, reforming the social safety net to enable beneficiaries to capitalize on market returns with their retirement savings is a sensible idea.

But what Washington doesn't have to do is outsource the management of Social Security to Wall Street or create private accounts where individuals can feel as if they're gambling with their futures. As largely passive money management firms like Vanguard Group, State Street and Barclays have shown, through the use of technology enormous pools of capital can be managed quite efficiently in index funds without money managers speculating in the market.

So along the same lines, why couldn't Social Security manage a series of index funds that track various aspects of the market? Some of the funds could hold extremely safe short-term debt securities and others could hold indexes of different classes of equity or debt. And everyone would benefit from the total portfolio's returns.

Unlike Bush's private accounts reform proposal, this idea wouldn't require a complete overhaul of the entire system. But it would require a change in Social Security's investment strategy to account for the full power of the financial markets. And it also would require the creative willingness on behalf of the government to pay for the best - and most honest - investment professionals to set up and run these funds for us.

Of course, this "safety in numbers" idea cuts both ways, which explains why the financial community is fully behind the president's plans. Since the advent of computerized record keeping, many Wall Street firms, banks, and insurance companies have found that the key to success is to get as many accounts as you can and charge fees to manage those accounts.

On Wall Street this is called gathering assets, and it's the logic that largely has propelled the consolidation of the financial community. Behemoths like Citigroup and J.P. Morgan Chase are based almost entirely on this idea - that you should get involved in as many transactions as you can, and charge a fee for your participation in each transaction.

So why do finance companies like the idea of privatizing Social Security and creating health care savings accounts, but hate the idea of national health insurance? In a word: fees.

Our health insurance system essentially allows the private sector to dictate who gets covered. Insurance companies spend vast amounts of money determining the risk of covering each patient and trying to deny claims of the patients they do cover. Meanwhile, anyone who falls through the cracks is handed over to the government. This is by far the most costly health care system in the world, accounting for 16% of our gross domestic product in 2004, which is more than twice the average of the 30 countries in the Organisation for Economic Co-operation and Development (OECD). If you ever wanted empirical proof of how inefficient our health care system is, there you have it.

The argument against turning over Social Security funds to Wall Street is even more compelling. Wall Street sees the pile of assets in Social Security and salivates over the potential fees. By establishing a middleman in a process that doesn't have one, we'd be putting an unnecessary toll booth on the Social Security highway. Why can't the government just hire the financial professionals to run the funds for us, and cut out the middleman - and his fees?

Obviously these are just rudimentary ideas meant as starting points for a real discussion about reforming our health care and retirement systems. The point is, the arguments over how to solve these looming crises don't have to fall into the typical trap of "privatization versus big government." The markets provide lessons we all should heed if we're going to get to the bottom of our economic problems.

Our country's greatest asset is its large and diverse population. Let's just hope our political leaders realize that there's safety in numbers, before it's too late.