Many people are not aware that the current system of employer provided benefits was a result of the New Deal wage controls that limited employee salaries. Thus, employers added benefits packages to attract the best candidates. The negative result of this trend was that employees became reluctant to switch jobs for fear of losing a good benefits package and employers became saddled with increasing benefits and human resources costs.

Part 1 of this series discussed the implementation of a Canadian style retirement plan to alleviate some of these costs. This installment offers some health care suggestions.

Congress is currently discussing a "public" or government health insurance option (based on Medicare) that it says is necessary to cover everyone without health insurance, while maintaining that those with employer based plans will be able to keep them if they are satisfactory.

The implementation of a government health insurance plan will result in:

a) Employers deciding that it is cheaper to put employees in the government plan than to purchase private insurance, thereby decimating the private insurance industry. It appears that congress will consider employer provided health insurance as a taxable benefit, thereby increasing the government plan transition rate.

b) Doctors being paid less for patients insured by the government plan (as is the case with Medicare), so there will be less incentive for doctors to treat these patients.

c) Government bureaucrats deciding which patients will be allowed certain treatments in order to reduce the prohibitive costs, thereby rationing health care. Seniors will be the first to be impacted.

d) An increase in the number of doctors who retire and a decrease in the number of medical students due to insufficient compensation, causing shortages and waiting lists.

e) A decrease in pharmaceutical innovation, since the government plan will pay less for expensive drugs. There will be a decrease in medical device innovation for similar reasons.

Ultimately, we will have the Canadian health care system, where my mother's cancer surgery was delayed by a month because the hospital closed the operating room to "elective" procedures, where not as lucky patients die while waiting for treatment and where doctors take three month vacations because compensation is inversely proportional to the number of patients seen during the year, such that seeing those patients may not provide sufficient income to keep the office open.

So, what are some solutions that do not involve a government option, but still provide portable insurance that is employer independent?

We have tax deductible health savings accounts, but I believe it maxes out at $5000, which won't help with a $12,000 family insurance plan.

A problem is having a large enough group over which costs and risk can be spread. I would love to be able to purchase health insurance through AAA (like my car and home policies) or Costco, where I know the plans will be competitive and costs will be controlled.

I just attended a computer consultants group meeting where I discovered that it provides a health care plan in other states, but not in MA due to government regulations. I'm a big proponent of states' rights, but just because a state government can be stupid doesn't mean it should be stupid (see CA).

I would like to see municipalities designated as groups, so that plans could be offered through municipalities. Note that the plans would not be run by the government, but by the private provider.

Other suggestions are welcome. You can post them here.

Many employees work for companies that provide a retirement plan. Private sector employees may have a 401(k). Public sector employees may have a 403(b). Employees who do not have such a plan may contribute to a SEP IRA. There are also regular IRAs, rollover IRAs and Roth IRAs, each of which have specific rules and tax implications.

Wait, there's more!

Employers pay a 401(k) management fee to a financial company, which provides a set of mutual funds to the employees as investment options. The problem is that only a few funds are available (10 - 12), many of them overlap (large cap growth and S&P 500) and there are rarely any funds available to hedge against inflation.

It has been my experience that the financial advisers, who get paid lots of money to come and talk to the employees about their 401(k), generally spout the usual mantra of "stocks are good long term investments" while showing a market chart from 1982 to prove their point, "bonds are less risky than stocks" while ignoring the bond market decimation of the 1970s and 1994, and are quick to say that inflation hedges such as precious metals and commodities are unsuitable for a 401(k) because they are too complicated for most people and there would be too many funds in the plan (ignoring the fact that four of the existing funds are redundant equity funds).

So, what does that leave us with:

a) An inequity between those who have employer based plans (usually with matching contributions from the employer) and those who do not.
b) Extra costs for the employer, who is paying a management fee, plus additional human resources salaries to coordinate the plan.
c) Plans that have restrictive fund selection and are tied to a single institution.
d) Employees who are kept ignorant of proper investing strategies due to the restricted fund selection and advisers who give misinformation.
e) An alphabet soup of different types of IRAs.

In other words - extra costs for employers to provide a benefit that is too restrictive, keeps employees ignorant about investing and is not available to all workers. It also leaves employees juggling multiple IRA and 401(k) accounts.

The solution: Implement the Canadian retirement plan system! (note: this is the retirement plan, not the health care plan)

How does it work? Every year a person can contribute up to 18% of his prior year's earned income to a tax deferred account. That contribution is then credited against the person's taxable income for the current year.

This account can be with a bank, trust company and/or stock broker. The money can be invested in CDs, stocks, bonds, mutual funds and/or exchange traded funds (ETFs). Precious metals and real estate are not possible investments, but there are ETF proxies for these sectors.

The advantages:

a) The retirement plan is tied to the person and not the employer, thereby increasing worker mobility (see future posting about severing health care from employers).
b) It is available to ALL workers, even the self-employed.
c) It reduces employer costs, so more employees can be hired and/or salaries raised.
d) There are virtually no restrictions on investment vehicles.
e) It forces people to become more active investors because more choices are available.
f) It forces financial companies to be more competative because they don't have captive employees that are forced to invest in a single company's funds.
g) It eliminates the financial company double charging - charging a fee to the employer and a fund management fee that employees are rarely aware of.
h) It eliminates the alphabet soup of IRAs and their associated tax headaches.

I know several people whose 401(k) accounts were decimated this past year because the management company refused to offer the US Treasury and precious metals funds that would have helped hedge against the market downturn. Also, the "money market" equivalent fund was invested in Fannie and Freddie paper and one of the three companies that insured the 1.00 NAV went broke, so that supposedly "safe" fund was close to collapsing.

There is no good reason why we should be stuck with the current system. In this case, change is good!