This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published July 14, 2011 on the Investors Business Daily website.
Our nation's entitlement programs, from Social Security to Medicare to ObamaCare to dozens of welfare programs such as Medicaid, are all based on simple, late-19th century tax and redistribution ideas. Politically, we will never be able to solve the entitlement crisis by simply trying to cut people's benefits.
As I discuss in my new book, America's Ticking Bankruptcy Bomb, the only politically viable solution is fundamental, structural reform that would modernize the systems to rely instead on capital, labor and insurance markets, with transformed incentives that would lead them to contribute to economic growth rather than suppress it.
Through such reforms, we can achieve all the liberal social goals of those programs far more effectively, serving seniors and the poor far better, at just a fraction of the costs of the current tax and redistribution framework. That would make the necessary reforms politically viable.
A real-world example is the 1996 reform of the old, New Deal era, Aid to Families with Dependent Children (AFDC) program.
The old program was based on a federal matching funding formula that paid each state more the more the state spent.
Welfare reform changed the incentives for the state bureaucrats by instead providing the federal funding through finite federal block grants that left states themselves paying for higher costs while fully enjoying any innovative savings. The incentives for the poor were transformed by requiring work from the able-bodied for the benefits.
The astounding results are well-documented.
Two-thirds left the welfare rolls of the old program, earning roughly 25% more in total income by working, which reduced poverty. And taxpayers saved more than half the costs of the old program in real dollars based on prior trends.
There are dozens of other federal/state welfare programs, perhaps numbering nearly 200, that should be reformed in exactly the same way -- including Medicaid. The states could then each adopt entirely new welfare programs providing all assistance to the able-bodied only in return for guaranteed work assignments.
That would eliminate virtually all of welfare's perverse incentives for nonwork and family breakup and illegitimacy, ensuring ultimately higher incomes for the poor through work and marriage.
Instead of paying the bottom 20% of income earners not to work, as today, we would be paying them to work and contribute to economic growth, primarily through real private-sector employment rather than taxpayer-financed benefits, resulting in enormous tax savings.
With all of these welfare programs together estimated to cost more than $10 trillion over the next 10 years, the savings would be in the trillions.
Real-world, 30-year-old examples from Chile, Galveston, Texas and the Federal Thrift Savings Program for federal employees show that instead of paying for all the benefits through the payroll tax as we do today, we could finance them through personal savings, investment and insurance accounts instead.
Because long-term, market investment returns are so much higher than what can be paid through the current, noninvested, tax and redistribution framework, future retirees would actually enjoy much higher benefits through such reforms. At the same time, they would be contributing mighty rivers of savings and investment to the economy that would promote booming economic growth.
The long-run result would be the greatest reduction in government spending in world history, as the benefits ultimately would be moved entirely from the public sector to market financing. Contrary to President Barack Obama's political rhetoric, all of the real-world examples of such reforms survived the financial crisis fully intact.
Just as the poor would gain far better health care through Medicaid-financed private insurance coverage, seniors would enjoy far better health care through Medicare-financed market insurance as well.
The fallacy of all the criticisms of House Budget Committee Chairman Paul Ryan's Medicare reforms is to compare those reforms to Medicare before ObamaCare. That system is radically changed by Obama's law.
Seniors would be far better served by market insurance that paid doctors and hospitals market rates, enabling them to maintain the high standard of health care seniors currently enjoy, standards unreachable under the coming Medicare system.
Seniors also will need that market insurance to save them from the arbitrary rationing and denials of health care under Medicare resulting from Obama's democratically unaccountable Independent Payment Advisory Board, which he exempts from democratic control precisely because of the menace it poses to seniors.
In addition to helping today's seniors, Ryan's Medicare reforms would be even better for future seniors, transforming the Medicare payroll tax into lifetime savings from a personal account that can help finance market health insurance in retirement.
Broader health care reforms also would help by letting patient-power market incentives and competition slow health care cost inflation.
Such modernizing reforms would result in comprehensive social safety nets that pre-empt human suffering while allowing for much smaller and more effective government and contributing to the booming economic growth that is the only real way to solve the nation's long-run fiscal crisis.