Many a policy wonk and politician has searched for answers to the major long-term structural problems that hang around our economy and future generations like a millstone.
The selection of Paul Ryan by Mitt Romney has served to elevate the debate over this simple truth: fixing our dramatically overburdened entitlement system should be job one for Congress and whoever is elected President this year.
But how do you tweak, fix or overhaul two programs – Medicare and Social Security – that are at once universally popular AND a mortal threat to our economic future? Reforming these programs has long been called, and with good reason, the third rail of politics. Touch them and you die.
Fortunately, from the current battle over Medicare that has been pushed to center stage in the presidential campaign to the bitter fight over union pensions in Wisconsin, we are finally starting to acknowledge how heavily these long term budget commitments are weighing on the federal as well as state governments.
But there is an important difference between the state and federal budget crises.
At the state level, generous pension plans for public unions, which have been a major contributing factor to exploding deficits, are a problem of quantity – governments promising more than their taxpayers can ultimately afford.
At the federal level, overpromising is obviously also a central issue, but it is compounded by another factor that makes a serious problem potentially catastrophic.
Uncertainty.
As we have seen since the financial collapse four years ago, businesses are reluctant to hire in a climate of uncertainty. The stock market can handle bull and bear cycles, but responds poorly to uncertainty. And government offering generous benefits to the entire population without the certainty of what those benefits will ultimately cost hangs like a sword of Damocles over our economy.
The answer to the problem is not sexy and it may not be politically easy, but it is simple. Like more and more businesses in the private economy, we must as a nation evolve from defined benefit programs to defined contribution programs.
We must restructure both Medicare and Social Security by ultimately converting them from programs that promise a fixed set of benefits to ones that offer a fixed subsidy to each taxpayer, like pension plans and 401K’s. And here’s the simple reason: defined contributions create cost certainty. Defined benefits do not. The cost of the promised benefits and how much the system will be used and abused can’t possibly be calculated accurately years in advance, and they always increase way beyond expectations.
This is why cost projections for Medicare went off the rails so quickly after its inception in 1965. The program would never have survived beyond a few years in the private sector. Oblivious to, or undaunted by the program’s obvious unsustainability, we’ve been accumulating unfunded Medicare liabilities – obligations we don’t have the money to pay – to the tune of some $80 trillion.
And the ranks of Medicare and Social Security recipients will swell as never before in the years ahead, as the most populous generation in American history, baby boomers, reach the age of eligibility, taxing an already overburdened system to the breaking point.
To understand how unsustainable they truly are, and the crippling debt our children and grandchildren will assume for programs from which they may well never benefit, you need only look across the pond to what is happening right now in Europe. The economies of Greece, Spain, Italy and others are falling like dominoes under the weight of out-of-control entitlements.
This can not stand.
The time is now to begin the long and complicated transition from a willful disregard of the impending bankruptcy of these cherished programs to solutions which, properly administered, will flood the marketplace with investors (in the case of Social Security) and customers (moving from Medicare’s government guarantees to private insurance) and create a whole new market for the private economy, which will generate competition, and thus lower costs and higher quality, and will certainly boost economic growth.
Ultimately, Medicare can only salvage its solvency through a second step of reform: allowing people to re-direct their retirement health care taxes from the government to their own health savings accounts, just as with accounts that replace Social Security.
This is not politics, this is reality. Absent realistic reform based on both scaling back what we promise and centering our treasured entitlement programs around contributions rather than benefits, these programs can come to no good end.
Indeed, the need to transform our entitlement system boils down to one simple truth.
We simply can’t afford it anymore.
