WELFARE: SAVINGS NOT TAXATION

In many countries, the rising cost of publicly funded health care, retirement, and other welfare programs is forecast to put increasing pressure on government budgets. As a result, many governments are seeking to reform their welfare states so that costs to the taxpayer can be reduced, quality of outcomes increased, and the plight of low- and middle-income earners improved. Regrettably, there are currently at least three problems with much of the debate about reform of the welfare state.First, disagreements are often focused around two opposing ideological viewpoints. One side is demanding more welfare spending and higher taxes, whereas the other is arguing for less welfare spending and lower taxes. Second, even when economists and others propose a welfare reform that appears promising in theory, designing the transition so that it is politically feasible is often overlooked. Third, the debates are typically quite narrow. They seldom focus on a comprehensive reform that would rewrite the rules governing the welfare and tax system as a whole, with the aim of making them work more fairly and efficiently.This article shows how a country can move from a publicly funded welfare system to one that relies largely on private funding coming from compulsory savings accounts. The reforms we propose are designed to overcome the problems outlined above. We use New Zealand, a nation with which we are familiar, as a case study, although the comprehensive reform we recommend can be adapted elsewhere.