Welfare: Savings not Taxation

CEPR Policy Insight No 89

Roger Douglas, Robert MacCulloch

Many nations are seeking to reform their welfare states so that costs to the government can be reduced and the quality of outcomes improved. As a potential way to achieve these aims, there has been a surge of interest in the Singaporean model which features compulsory savings accounts and transparent pricing of health services. It has achieved some of the best health-care outcomes in the world at a cost that is the lowest amongst high income countries. Policy Insight 89 shows how tax cuts can be designed to help establish compulsory savings accounts so that a publicly funded welfare system can be changed into one that relies largely on private funding in a politically feasible way. A new unified approach to the funding of health, retirement and risk-cover (for events like unemployment) through the establishment of a set of compulsory savings accounts is presented in the paper with a case study of New Zealand used as an illustration. The fiscal impact of the proposed reform on the government’s current and future budgets is reported, as well as its effect on low, middle and high income individuals.