They say based on the lack of federal funds to make the crop insurance program an adequate safety net, concerns the program cannot meet the needs of all producers, and the ratings variations, it is time to consider an alternative that is less cost to the government. The economists point to a number of similar programs that have been proposed. But in the CISA program federal funds would be available to fill in a gap should a producer not have enough in an insurance savings account to indemnify his crop loss.
The economists say their program would solve many criticisms of other proposals. “The proposed design should exhibit minimal moral hazard and adverse selection problems. As well, under the CISA system, farm-level risk would no longer have to be priced, thus eliminating the premium rating difficulties that weaken actuarial soundness and trigger the need for substantial external subsidies. In addition, administrative costs should be relatively small.”
Here is how it would work:
- Withdraws from the account are made when farm revenues in a given year fall below a pre-specified threshold.
- Once a balance reached a specified level such as 65 percent of a farmer’s 5-year revenue moving average, it would be capped.
- Farmers who have a negative balance, and hence have borrowed money from the government, are required to temporarily contribute a higher percentage of their revenue than the pre-specified rate. It would be charged only in years when actual revenue exceeds the 5-year average.
- Like a traditional individual retirement account (IRA), positive balances in CISAs may be withdrawn after retirement from farming or bequeathed to heirs in the event of death.
- The viability of the proposed crop insurance system rests squarely on one issue: the proportion of farmers that will reach retirement with a negative account balance.
The economists developed a computer model for 10,000 farmers, testing five regular contribution rates equal to 1 percent, 3 percent, 5 percent, 7 percent, or 9 percent of a farmer's 5-year revenue moving average as well as three different revenue guarantee rates that are 65 percent, 75 percent, or 85 percent of that moving average. They found at a 9 percent contribution rate with a 65 percent revenue guarantee, the simulations indicate that only 2.85 percent of farmers would ever have a negative CISA balance and less than 0.005 percent would end with a negative balance. In the reverse case of a very low contribution rate of 1 percent and a high revenue guarantee of 85 percent, nearly all farmers will at some point need a loan from the government and over half would end with a negative balance. Participants on average have positive but moderate account balances upon retirement ($427, $461, and $449 per acre respectively).