|
|
 |
Changes in the Health Care and Pension System in the Context of Public Redistribution
Abstract
An important task facing countries undergoing a transition from a planned to market economy is to consistently and consciously cut down on government functions, entrusting them to the private sector. Health care and retirement provision are, as a rule, the first areas to undergo changes. It is obvious that the choice of reform models determine not only the success and efficiency in supplying these services, but also the soundness of the whole economy and the extent to which the public sector (redistribution) exerts pressure on the private one.
Over the last years Lithuania has instituted some changes to the social safety net. Of these, the most important are the 1995 pension reform and the 1997 health care reform. Yet, the aforesaid policy shifts failed to reduce the ever-increasing redistribution, as will the changes scheduled for the near future. According to LFMI's data, in 1993 taxes accounted for 28.2 percent of GDP, and in 1996 this indicator peaked at 34.2 percent. This paper is aimed at providing some insight into why recent changes are unacceptable and contradictory to Lithuania's general direction of reforms. It will also delineate principles that should guide the creation of a viable and efficient health care and pension system. Although based on Lithuanian data and reform experience, this material is targeted at any country in transition.
Health care reform has long been on Lithuania's reform agenda. 1996 saw the adoption of a new law on health insurance, a law whose preparation was initiated three years ago. The law in question introduced a centralized, inflexible system disregarding private medical service suppliers and private insurance companies. The health care system is now financed from mandatory contributions payable to the health insurance fund. The state budget contributes to the system on behalf of children, pensioners, unemployed, and some other groups of residents, who constitute the majority of the insured. Thus, the formation of a health insurance fund builds on some obscure mixture of budgetary and insurance-type financing.
Insurance principles fail to be consistently applied in paying for medical services. There is a whole range of free services. Certain services are rendered and compensations (e.g. for medicines) are available to the insured and those not covered by insurance alike. Medical services are provided at fixed prices.
The aforesaid reforms are very unlikely to create an efficient system of financing health care insurance. Given that medical establishments will be interested in swelling their expenses, sickness funds will constantly lack money and the state budget will be forced to subsidize them. Mandatory public health insurance will operate on purely administrative principles. There will be no room for competition, therefore the system will fail to achieve the desired objective of high quality of services.
What principles of health insurance would help create a financially sustainable and efficient health care? First and foremost, health insurance should be based on real but not "pseudo" principles. No medical services should be free of charge, save some basic services provided for socially assisted groups. Their prices should be established by market forces, and health insurance should help patients pay these prices. Patients should have a right to choose among service suppliers and insurers. Public establishments and private health care entities and insurance companies should operate under equal rules and with equal rights. Unrestricted competition and patients' right to choose on the market would eventually force out-moded and inefficient structures out of the market, allowing customers' to receive the best value for their money. The Lithuanian Free Market Institute formulated and widely disseminated the aforesaid principles, gaining a broad-based support of specialists and the general public. The Lithuanian health insurance is to undergo certain changes. Yet, the path of compromise-making and repairing partly operating mechanisms would make it hard to create an appropriate system, much harder than installing an entirely new one.
The year 1995 saw changes to the pension system. Until 1995, Lithuania had been operating virtually a flat pension system, a system that would prove to difficult to be adjusted to new needs. On the adoption of a new pension law, Lithuania switched to an earnings-related pension scheme. The reform was launched with the hope that it would give people an incentive to return to the legal labour market. Yet, that did not happen. The number of the insured continues to fall, showing that people lack confidence in the public pension system.
Lithuania's problems in the area of pension insurance are similar to those in other Central and Eastern European countries. Social insurance expenditures have been steadily increasing, reaching the present level of 9 percent of GDP. The social insurance budget is continuously suffering a deficit, even though the size of pensions is on the edge of poverty and insufficient to live on (the average pension is about USD 55). The pension replacement rate has declined from 50 percent in 1992 to below 40 percent today. Further, the pension insurance system is already under strain because of the aging population. The number of people under the retirement age has been increasing and constitutes today about 20 percent of the country's population. Regrettably, many social benefits are irrational and badly targeted. Social outlays, which continue to increase, are inefficient and place a cumbersome burden on the society.
The recent pension reform failed to live up to the desired objectives of facilitating pension financing and providing safe retirement. There is an evident need for a more massive reform of retirement provision. Lithuania should switch from the earnings-related pension model to flat, subsistence-level, pensions financed from the state budget. Under a two-pillar pension system, state pensions would provide only minimal retirement benefits. The second-tier would provide fully-funded optional pensions administered by private managers. A draft law on private pension funds has been prepared, laying the legal foundations for the accumulation and disbursement of fully funded pensions. The bill is scheduled for government approval and submission to parliament shortly. The proposed system will operate on a defined-contributions scheme. Pension fund members will pay pension contributions to personal accounts, which will be administered separately. These contributions will be invested, and investment returns will be accrued on personal accounts in proportion to accumulated amounts.
With private pension insurance in effect, it will be essential to redesign the financing of the public pension scheme. At first, it will be essential to exempt payments to private pension funds and gradually reduce the rate of social security contribution payable by pension fund members. Later, after revising the principles of budget formation, the separate social insurance budget will have to be eliminated, and public pensions will be financed from the state budget. A reform like this would significantly contribute to improving the business climate and promoting competition. The current system of financing the social insurance budget by means of a painful and extraordinary taxation of labour force hampers economic transformation, stimulates shadow labour relationships, and stifles economic competitiveness.
Pension funds as major saving and investment institutions will contribute significantly to the development of the capital market. The institutionalisation of retirement savings become, as a rule, a major force behind financial innovations. An increased supply of capital accumulated by pension funds will makes it grow cheaper, facilitating considerably enterprise financing.
The implementation of the aforesaid principles in redesigning the pension and medicare systems would create prerequisites for (i) the development of a competitive economy and (ii) revision of other functions that are currently under state control. Reductions in redistribution would not be an end in itself. The underlying idea of the proposed transformations would be a consistent and conscious denationalisation of economic and social life as well as renunciation of the paternalist government vision, giving way to private initiative and responsibility.
|
Copyright © 1999 - 2005 Lithuanian Free Market Institute. All rights reserved. |
