Far from settling the major issues facing the country, this year’s election results showed that Americans are deeply ambivalent about how to address such issues as Social Security reform, Medicare reform, and tax cuts. Indeed, because the president-elect won by such a narrow margin, he will not have a clear mandate to tackle these issues and will have to build a bipartisan coalition within – ironically – a Congress in which the majority party leads by the slimmest of margins.
American’s ambivalence about how to address these tough issues does not make them go away. As most Americans should be aware by now, Social Security will begin running cash deficits in just 15 years. Once begun, those deficits will total $22 trillion through 2075, after adjusting for inflation.
On the other hand, the presidential debate only muddied the fact that Medicare’s financial future is just as bleak. According to the most recent actuaries report, Medicare will begin running cash deficits in 2010, and faces a cumulative cash shortfall of $12.6 trillion through 2075.
The Congressional Budget Office recently estimated that unless lawmakers act to reduce these liabilities, “spending on the major health and retirement programs will more than double, rising from 7.5 percent of GDP in 1999 to over 16.7 percent in 2040.”
In order to get the American people to face up to these realities, the new president will not only have to work across party lines, but he will have to mount a massive public education campaign to explain why these programs are spiraling out of control.
Americans must be made to understand that the fundamental design of entitlement programs such as Medicare, Social Security, and Medicaid leads to such cost escalation. First, these programs are open-ended defined benefit programs in which anyone who is eligible has every incentive to use as much of the service as they can because they will not pocket the savings if they don’t. Second, these programs operate outside of the disciplines of the marketplace and must rely on bureaucratic price controls (or benefit cuts in the case of Social Security) in order to keep the programs’ costs from spiraling out of control.
The only way to correct this runaway incentive system is to redesign each program into a defined contribution program that promises recipients a specific level of financial assistance but gives them greater say in how the money is spent. Such a change would not only save money for the government and taxpayers – by making the costs of these programs more transparent and predictable – but it would also improve the quality of service for recipients.
Federal workers can now take advantage of two such programs in meeting their health insurance and retirement needs. For their retirement, federal workers can invest in the Thrift Savings Program – their version of a 401(k) – which offers them a variety of investment options, including a bond fund, a mixed fund, and a stock index fund. The government matches their contribution up to five percent. Similarly, under the Federal Employee Health Benefit Program (FEHB), the government pays a certain amount toward their health insurance costs but allows federal workers to choose from among dozens of competing health insurance providers. Such a system puts workers in the driver’s seat, improves service, and controls costs with a minimum of regulatory interference.
Fortunately for the new president, these two systems are the models for the leading bipartisan Social Security and Medicare reform plans in Washington. Last year, for example, the National Bipartisan Commission on the Future of Medicare – led by Senator John Breaux (D-LA) – suggested that FEHB be used as a model for stemming the cost of Medicare while improving options available to seniors. Under such a system, the government would give each senior a voucher equal to the current per-beneficiary cost of Medicare, say $5,500, and allow them to choose among a variety of certified providers. This method of reform is also the most reasonable way of addressing the prescription drug issue.
The leading Social Security reform plans have also been developed under the banner of bipartisanship. Indeed, a plan developed by Charlie Stenholm (D-TX) and Jim Kolbe (R-AZ) in the House, and Judd Gregg (R-NH) and John Breaux in the Senate, would allow younger workers to invest two percent of their payroll in a qualified investment plan that they would own and control. While the plan would make other structural changes to the system to reduce the long-term liabilities, the most important change is the ability of workers to build a nest egg that they own and which could be passed down to their heirs.
While it is usually preferable to have a president take the oath of office with a clear mandate in hand, this year’s election outcome may be more of a blessing than a curse. The politics of reforming Social Security and Medicare in the right way will require a level of bipartisanship not seen in Washington for many years. It will take a considerable leader to rise above the narrow election margins and build the broad-based support needed to enact real change.
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