Entitlements

The Moral Case

It is wrong to make a promise you cannot keep. For decades, politicians have promised to support their constituents in old age, to provide their medical care and to pay for the medical needs of the poor. While the government has a duty to provide a minimal safety net, the current entitlement system creates dependence but still leaves 10 percent of American seniors in poverty.

Without reform, this leaves the country with two unfair outcomes:

(a)    Either future generations will pay far more into the system than they can take out, or
(b)   The system will go bankrupt, and the poor will be the most harmed by the safety net’s disappearance.

 

The Principles

Entitlement reform must always adhere to three principles:

  • Entitlements were created to serve as a safety net for the needy, not as a prop for the middle class.
  • Entitlement systems should encourage individuals to continue working and saving so long as they are able.
  • The system should encourage people to use the money and services they receive wisely and responsibly, rather than promoting overuse and runaway spending.

 

The Policies

Social Security is the easiest entitlement program to reform and can be done without raising taxes.

  • The age should be gradually raised to 70 by 2065.
  • Benefits should be indexed to price inflation, not wage inflation, as the program’s purpose is to keep the elderly out of poverty.
  • Benefits should gradually be reduced for earners with high incomes. The system should be a way to keep individuals out of poverty, not create a dependent upper- and middle-class.

Together these three reforms would ensure Social Security stays solvent. The entire system, however, could be easily replaced with a new program designed to keep seniors out of poverty and empower them throughout their retirement. People should be given the incentive to work longer by eliminating the Social Security payroll tax for individuals over 62, and a basic income supplement should be provided to impoverished senior citizens. Workers should then be given ownership of their retirement savings by enrolling all workers 55 and younger into a retirement savings account funded by 5 percent of the worker’s earnings (2.5 percent from the individual and 2.5 percent from the employer). These simple reforms would create a system that  actually provides a safety net for needy citizens — all for 60 percent of what the U.S. currently spends on Social Security.

Medicaid is slightly more difficult to improve. Through poor structure, the system encourages reckless spending and program growth. For every dollar a state spends on Medicaid, the federal government provides a match of between one-to-one and three-to-one. Thus, each time a state provides medical care through Medicaid, the federal government matches with more funding than the state spent. States are therefore seldom thrifty, as the burden falls primarily on the federal government. Services are thus offered to more and more people, far outside those living in poverty. Instead, Medicaid should be issued to the states in block grants — one sum for the entire year — based on the state’s poverty rate. States will then have to spend wisely, budgeting their money for important services and for truly vulnerable individuals.

Medicare is the hardest entitlement to tame. Medicare’s problem is the same as Medicaid’s: individuals are encouraged to overspend. The program guarantees unlimited payment for health care costs, causing projected costs to rise from $521 billion in 2011 to $725 billion in 2020 due to the growing population of seniors. The U.S. should begin by gradually raising the benefit age to 67, with disability still being available for those who need it. The U.S. must then move from defined benefits where every expense is covered to defined contribution, where a certain level of coverage is guaranteed. The level of coverage can be calculated based on age, income and health status, and be put into an account for the seniors to dedicate to preapproved private plans.

AEI