This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published November 9, 2011 on The American Spectator website.
In 1858, U.S. Senator Stephen A. Douglas was facing a tough reelection challenge in Illinois from former Congressman Abraham Lincoln. A serious, reasoned America was at the height of debate over the fundamental human rights challenge posed by its contradictory maintenance of the vile institution of slavery, in the most path-breaking, classical liberal nation in the world.
Lincoln and Douglas held seven 3-hour debates in that reelection fight. First one candidate spoke for 60 minutes, then the other for 90 minutes, then the first for another 30 minutes. Crowds came from other states to hear and see the epic intellectual battles between the two. Newspapers sent stenographers to record the debates with the crude technology of the time.
Douglas, the then famous incumbent so well connected throughout Illinois, won that election. But Lincoln won the debates, publishing them in a book and riding them to the Republican nomination and then the White House in 1860.
On Friday night, November 4, GOP Presidential frontrunner Herman Cain and surging challenger Newt Gingrich, second in Iowa in the most recent poll, brought that same reasoned seriousness back to America by joining one on one in their own Lincoln-Douglas style debate sponsored by the Texas Tea Party at the Woodlands Resort and Conference Center outside Houston.
The topic of the debate was the most serious economic challenge of our time: entitlement reform. I personally attended, and was gratified to hear the two cite me by name and my lifelong work on entitlement reform multiple times.
Social Security Prosperity
Somehow the two men managed to address the most complex domestic policy issue facing our nation without media all stars from CNN and NBC devising the brilliant questions for them to answer. Prompted only by brief, intermittent questioning from two moderators, Congressman Steve King (R-IA) and Ben Streusand, the Texas Chairman of Americans for Prosperity, Cain and Gingrich engaged in extensive civil discussion back and forth, explaining more sophisticated solutions than the so-called mainstream media has been able to explore in any forum or format, debate or otherwise.
Cain is highly knowledgeable, articulate and entertaining. Gingrich, set free from absurd 30 second limits on answers, unleashed an encyclopedia of fundamental entitlement reforms, presenting a pro-growth, freedom and prosperity vision of modern, 21st century safety nets. The fact that the two agreed virtually on everything shows how deep into the Republican Party these sweeping, fundamental reforms have penetrated.
Conservatives take heart; these reforms would cut federal spending in half from where it would be otherwise, saving the American Dream. I know. The reforms reflect a lifetime of my own work.
Cain has repeatedly and wisely expressed his support for path-breaking personal accounts for Social Security. But Gingrich has presented a thorough vision of such reform, starting with his new Contract with America, detailed in probably the most thorough campaign document ever to be released this week, and discussed at the debate.
Gingrich proposes freedom for younger workers to choose to save and invest at least part of what they would otherwise pay in payroll or income taxes into personal savings, investment and insurance accounts. Over an entire working career, at just standard, long term, market investment returns, workers of all family combinations and income levels would accumulate several hundred thousand dollars in these accounts after inflation, approaching a million dollars or even more in some cases depending on how big the option is over their careers.
Those accumulated funds would pay all workers of all income levels much higher benefits than Social Security even promises let alone what it could pay. Retirees would each be free to choose to leave any portion of these funds to their children at death.
To the extent each worker chooses to exercise this account option, the account benefits would substitute for a portion of future SS benefits. Through this process alone, all future Social Security deficits would be eliminated without tax increases or benefit cuts, because the accounts take over so much responsibility for paying future benefits. Indeed, because of the real investment returns earned by the accounts, future retirees would enjoy higher rather than lower benefits. If the accounts are eventually expanded sufficiently, they would eliminate completely the unfunded liability of Social Security, which would be the greatest reduction in government debt in world history.
With workers financing their own benefits through their own savings and investment, they can be free to individually choose their own retirement age, rather than the government choosing it for them. Moreover, they would have market incentives to choose on their own to delay their own retirement ages as long as possible, because the longer they wait the more they would accumulate in their accounts, and the higher benefits those accounts could pay.
Because the personal accounts shift the payment of future Social Security benefits off of federal taxes and spending to real private savings and investment instead, they result in the largest, most dramatic reductions in federal spending in world history.
The personal accounts also funnel mighty new rivers of savings and investment into the economy, creating new jobs, increased productivity, higher wages, and faster economic growth for working people today.
The Chief Actuary of Social Security has repeatedly scored several proposed personal account bills over the years as achieving precisely these results, including the bills proposed by now Budget Committee Chairman Paul Ryan in 2004 and 2005. I worked extensively with Ryan directly in helping to draft those bills and getting them scored by the Chief Actuary. Rep. Thad McCotter also introduced such legislation on Sept. 12, scored by the Chief Actuary as achieving the same results. I worked closely with him in writing up that bill and getting it scored as well.
These accounts have been proven to work exactly this way in the real world. That includes the experience of Chile over the past 30 years, the experience of a similar private savings and investment system for local government workers in Galveston, Texas over the last 30 years, and the analogous experience of the federal employees’ Thrift Savings Plan for almost 30 years.
The transition to the accounts, paying benefits to today’s retirees while today’s workers are saving money in their accounts, would be financed by reductions in government spending resulting primarily from the other entitlement reforms discussed at the debate. That is precisely what was done in the Ryan Roadmap, to which I also contributed.
McCotter’s bill, in fact, specifically provides that the personal accounts are to be financed entirely through a Spending Reduction Account in the budget. His bill involves reductions of over $12 trillion in future federal spending, caused by the accounts financing half of future Social Security spending through private savings and investment instead, and the transition spending cuts, as indicated by the Chief Actuary’s score.
Gingrich’s explicit long-term vision is to expand these accounts over time so they ultimately finance all of the benefits now financed by the payroll tax, eventually allowing that tax to be phased out entirely. That would be the greatest reduction in taxes in world history. The debate audience expressed strong enthusiasm for such personal accounts.
Block Grant Welfare to the States
Gingrich also drew attention to an historic turning point in welfare polic
y that was achieved while he was Speaker, with the enormously successful 1996 reforms of the old Aid to Families with Dependent Children (AFDC) program. Those reforms implemented the ultimate welfare policies favored by President Reagan and his long time welfare guru Robert Carleson.
The reform returned the share of federal spending on the AFDC program to each state in the form of a “block grant” to be used in a new welfare program redesigned by the state based on mandatory work for the able bodied. Federal funding for AFDC previously was based on a matching formula, with the federal government giving more to each state the more it spent on the program, effectively paying the states to spend more. The key to the 1996 reforms was that the new block grants to each state were finite, not matching, so the federal funding did not vary with the amount the state spent. If a state’s new program cost more, the state had to pay the extra costs itself. If the program cost less, the state could keep the savings. The reformed program was renamed Temporary Assistance to Needy Families (TANF).
With these fundamentally changed incentives, the reform was shockingly successful, as the old AFDC rolls were reduced by two-thirds nationwide, even more in states that pushed work most aggressively. As a result, in real dollars total federal and state spending on TANF by 2006 was down 31 percent from AFDC spending in 1995, and down by more than half of what it would have been under prior trends.
At the same time, because of the resulting increased work by former welfare dependents, the incomes of the families formerly on the program rose by 25 percent, and poverty among those families plummeted.
Gingrich proposed, with assent from Cain, to extend the same reforms to all remaining federal means-tested welfare programs. This would amount to sending welfare back to the states, achieving the complete welfare reform dream of Reagan and Carleson in restoring the original federalism and state control over welfare. It also follows the spirit of the Tea Party in restoring power to the states and gaining control over government spending, deficits and debt. The audience at the debate expressed strong support for this as well.
States would then be free to each completely redesign their own welfare programs. But if they would provide assistance to the able bodied only in return for work first, they can completely eliminate the work disincentives of welfare. Moreover, the minimum wage, plus the Earned Income Tax Credit (EITC), plus the Child Tax Credit are enough by themselves to bring every family out of poverty with full time employment. To the extent each state is successful in finding private work for the poor, the cost of ending poverty would be borne primarily by private employers paying wages in return for work, rather than taxpayers.
Consequently, instead of taxpayers paying the bottom 20 percent in income not to work, as today, employers would be paying them to work. As a result, the bottom 20 percent would be contributing to the economy, rather than drawing out of it through public support financed by taxpayers. Through required work, the welfare incentives for family breakup and illegitimacy would also be eliminated entirely.
With all the programs of the current welfare empire estimated together to cost $10 trillion over the next 10 years, the resulting savings to the taxpayers from these reforms would be several trillion just in those first 10 years alone, as the 1996 reforms indicate.
Obamacare versus Patient Power
With the overwhelming burden of already badly overpromised entitlement programs threatening long-term fiscal chaos and the end of America’s traditional world-leading prosperity, President Obama decided the top priority was to make the problem worse with Obamacare, which wildly adds or expands future entitlement spending.
Gingrich proposes that the problem of the uninsured can and should be solved through a health care safety net focused on the truly needy, assuring that no one will suffer lack of essential health care, for just a small fraction of the cost of Obamacare. He explains that this can and should be accomplished with no individual mandate and no employer mandate.
That would begin by block granting Medicaid to the states as above, which Gingrich and Cain both strongly supported. The states can then transform Medicaid into just providing the premium assistance needed by those Americans who truly cannot afford health insurance, a relatively modest number. That would enormously help the poor, because Medicaid does not pay enough to doctors and hospitals for the poor to get timely health care, while private insurance pays the market rates that enable the middle class to get quality care. High risk pools for the few uninsured who then become too sick and costly to buy private insurance would complete the safety net with targeted assistance.
Costs can be controlled by expanding HSAs throughout the health care system. Workers can be allowed the freedom to choose them in place of employer provided coverage, the poor can be allowed to choose them for their Medicaid coverage, seniors can be allowed to choose them for Medicare. Gingrich pioneered HSA legislation while Speaker, and explicitly favors extending them throughout the health care system. Cain supports HSAs as well. Further cost reductions would be achieved through interstate sale of health insurance, and the repeal of costly regulations greatly adding to health costs.
Gingrich also explicitly favored the Ryan plan for Medicare, if it is offered as a free choice for seniors, rather than a mandatory imposed change. With such freedom alone, seniors will be fleeing old Medicare, butchered by Obamacare cuts to payments to doctors and hospitals, and the further cuts and rationing imposed by the Independent Payment Advisory Board. The Gingrich plan also involves eventually a personal account for the Medicare payroll tax, which would finance a private sector annuity in retirement providing further funds to buy private insurance, besides Ryan’s premium support.
The Houston Tea Party audience wildly supported such repeal and replacement of Obamacare as well.