Because of these market failures, the privatisation of social insurance may often require some sort of government regulation to make it work. It has already become clear that getting this regulation right is crucial to the success of the transition, and that getting it wrong is all too easy. There seems to be a compelling case for privatising pensions for most of the population. The market failures affecting private pensions are manageable. That would leave the state simply to provide a safety net for the poor.
Health care is much trickier.
Market failures, particularly adverse selection and long-term uncertainty about costs, mean that, left alone, the private sector is likely to provide only limited health insurance that will fall short of most people s lifetime needs. There is a strong case for letting private firms provide the health care even if much of the funding comes from the taxpayer. And there may be scope for private health-care products that fall short of full insurance but give patients more choice, and confront them with some of the cost implications. The biggest problem everywhere is to deflate the public s unrealistic expectations about how much care can be provided at a given level of expenditure, whatever the public-private split. The current crisis in the welfare state is due in large part to previous generations of voters insistence that the state should play Santa Claus, and to politicians unwillingness to disappoint them.