Academic journal article AEI Paper & Studies

Increasing the Effectiveness and Sustainability of the Nation's Entitlement Programs

Academic journal article AEI Paper & Studies

Increasing the Effectiveness and Sustainability of the Nation's Entitlement Programs

Article excerpt

Executive Summary

The United States faces a large and growing fiscal challenge that is being ignored by most of the nation's policymakers. The Congressional Budget Office (CBO) projects that debt held by the public will reach 100 percent of gross domestic product (GDP) in 2039. (1)

The primary cause of the problem is the steady, decades-long rise in entitlement spending. Over the past 75 years, the United States has built a vast and sprawling network of social welfare protections and programs--the entitlement state. These programs' cumulative costs now threaten to push the federal government past the point of insolvency.

However, it is insufficient to base a push for reform on a fiscal rationale alone. Reforms must be--and must be understood by the public as--good ideas that improve the programs' effectiveness and efficiency, separate and apart from budgetary effects.

Although entitlement programs vary greatly in their roles and design, the important themes for reform should be:

* Promotion of Work. Much of the federal safety net is designed to help households that have inadequate resources from earned income. But it is counterproductive when government programs discourage work and thus create unnecessary dependence on public support.

* Personal Responsibility. Most working-age households with middle-class incomes (or higher) could save and provide for their own retirement without subsidization from other taxpayers. Entitlement reform should proceed on the assumption that limited public resources should provide a solid safety net against poverty in old age, but that those who can afford to save for retirement should be expected to do so.

* Innovation and High Quality in Health Care. Slowing cost escalation in health care without undermining the quality of care requires higher productivity and more efficiency in how care is provided to patients. That can be achieved only with a functioning marketplace.

The federal government's entitlement spending is concentrated in Social Security, health care programs, and the safety net for lower-income households. Reforms are necessary in all three areas.

Social Security. The current Social Security program provides benefits to nearly all retired Americans, including those with higher incomes, based on their preretirement earnings. Social Security, however, does a poor job of preventing poverty in old age.

Social Security should move toward providing a universal flat benefit, set initially at the federal poverty line, to all US residents age 65 and older. In effect, Social Security would shift toward becoming a guarantee against poverty in old age rather than a scheme for partially replacing preretirement earnings for middle- and high-earning households. There would be a long transition from the current formula to the new benefit to ensure no one lost accrued benefits. This new benefit would eliminate old-age poverty and would be sustainable over the long run with a lower payroll tax rate.

The flat benefit would provide lower Social Security benefits to middle and higher earners. They could offset this income with additional private savings, facilitated with reforms promoting automatic 401(k) enrollment and simplified 401(k) plans for small employers. In addition, a reform plan should eliminate the 12.4 percent Social Security payroll tax at age 62, thus removing a major disincentive to continue working at older ages. This change could be coupled with increasing the early retirement age (now 62) to age 65 during the transition to the flat benefit.

Health Care. With the passage of the Affordable Care Act (ACA) in 2010, the federal government assumed even more control over the allocation of resources in the nation's system of health insurance and health care. Over time, this will result in lower-quality health care. What is needed instead are market-based reforms that empower consumers to pursue high-value and low-cost care. …

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