A Stitch in Haste

I rarely blog about Becker-Posner posts, mainly because there's hardly ever any need. The posts emerge fully formed from the heads of these two extraordinarily brilliant men. One can rarely add anything to their commentary other than, "But of course."

But this time I can add a minor footnote to Becker's post about Health Savings Accounts. (He's for them and for expanding them, which is fine.)

Health Savings Accounts allow workers with high insurance deductibles to save on a pre-tax basis to cover the cost of those deductibles. The HSAs (which are essentially "medical IRAs") encourage saving and an efficient level of spending on health insurance (since the worker is spending, or not spending, his own money without the distortions of government financing or employer subsidies). HSAs are also like IRAs in that unspent account balances carry over from one year to the next. A worker who, through luck or wisdom, has low medical expenses during her career can accumulate savings over time, with the total unspent balance available for retirement upon reaching eligibility for Medicare at 65.

Becker's favorable analysis of the features of the HSA, meanwhile, is a good opportunity to point out the comparative economic inefficiency of the "use it or lose it" rule for Flexible Spending Accounts, which are similar to, but distinct from, the Health Savings Accounts that Becker critiques. Under "use it or lose it," FSA balances are not carried over from one year to the next and allowed to accumulate over time. The unspent funds are instead forfeited, with no opportunity for FSA balances to grow over time as is possible with HSAs.

The FSA rule leads both to suboptimal contributions (since a participant will undercontribute in light of the risk of forfeiture), and to wasteful overspending (or misallocation) since he is compelled to spend any excess balance toward the end of the tax period to avoid forfeiture of residual funds. (Ever walk past an optometrist store around tax time? The windows are often plastered with signs reading something like "Don't lose your flexspend money, buy eyeglasses now!").

As I've blogged previously, with all the talk of an "Ownership Society," it seems utterly bizarre that the Administration has not sought to revoke this very "anti-ownership" rule for FSAs. All the arguments for private Social Security accounts apply to FSAs, and the lost tax revenue would likely not be too onerous on the federal budget. And it would get people comfortable with the idea of private accounts for all workers, including the working poor whom liberals claim to care about.

Of course, in the alternative, the government could abolish FSAa altogether and instead greatly liberalize the rules for HSAs, which again do not have the "use it or lose it rule."

Either way, tax-advantaged accounts for medical expenses are a ideal baby step towards Social Security reform and the other aspects of the "Ownership Society," the single best idea this Administration has ever had.