The New Republican Vision for Modern Social Safety Nets

Peter Ferrara

10/19/2011 10:29:00 AM - Peter Ferrara

A new consensus is emerging among Republicans for fundamental entitlement reform providing for modern, 21st century social safety nets. The new, reformed programs would actually achieve all of the social welfare goals of the current programs far more effectively, ultimately serving seniors and the poor far better. But because they would centrally rely on modern capital, labor and insurance markets, with a minimum of old fashioned tax and redistribution, they would achieve these goals at just a fraction of the costs of current programs.

These modern markets utilize highly effective market incentives and competition to achieve the social welfare goals. In the process, the new, reformed programs would reinforce and promote economic growth rather than detract from it. These programs would also build on proven policies for booming economic growth, which is the foundation for ensuring that all basic needs are met. This new, emerging, Republican consensus clarifies the debate between the parties. The debate is now more clearly between two competing visions for social safety nets ensuring that essential needs for food, clothing, housing and health care are satisfied, and which vision is better both for those served by these programs, and the taxpayers. Note that even Hayek, the intellectual godfather of modern libertarians, supported the concept of basic social safety nets.

The new consensus began with Rep. Paul Ryan introducing bills in 2004 and 2005 providing workers with the option to choose personal savings and investment accounts to finance their future Social Security benefits. Those bills grew into the Ryan Roadmap, which included those personal accounts, as well as fundamental reform of Medicare, Medicaid, health care, and even the tax code. The Roadmap financed the transition to personal accounts through the reduced spending resulting from the other entitlement reforms.

President George W. Bush campaigned on personal accounts for Social Security quite effectively in 2000, less so in 2004. But his Administration failed to follow through on proposing any plan fulfilling the promise of that robust 2000 campaign on the issue. This year, GOP Presidential candidate Herman Cain has explicitly endorsed for the U.S. the enormously successful personal account system adopted in Chile 30 years ago.

As discussed last week, Rep. Thaddeus McCotter recently introduced a very well developed, advanced plan for personal accounts for Social Security. Like the earlier personal account legislation introduced by Ryan, McCotter's bill was officially scored by the Chief Actuary of Social Security as eliminating all future deficits in the program without benefit cuts or tax increases. That results because the personal accounts take over responsibility for financing so much of the program's future benefits that the deficits are eliminated through that effect alone. But these threads have now flowered into a full new vision for entitlement reform in Newt Gingrich's recently released 21st Century Contract with America, which can become a platform for the entire Republican Party to campaign on successfully next year. Gingrich writes in the Contract,

I reject the idea that we can solve our budget and debt crisis by some combination of cutting benefits and raising taxes within the current framework of these two programs [Social Security and Medicare]. Instead, we need to think outside the box with fundamental, structural reforms that would transform and modernize these two programs, changing how they work to achieve their goals.

Then he introduces as a fundamental principal of his entitlement reforms that they will be based on the voluntary choice of each individual, writing: "Any American who wants to enter or remain in the existing Medicare and Social Security programs will be able to do so, but we will introduce optional alternatives that give Americans more control over their health and retirement."

Gingrich then endorses as a specific example of such reform: "a voluntary option for younger Americans to put a portion of their Social Security contribution into personal Social Security savings accounts. Other countries, such as Chile, have found that this model creates vast savings while giving beneficiaries more control over when and how they plan to retire."

Such personal accounts serve seniors far better because they will pay much higher benefits than Social Security even promises, let alone what it can pay. That is because the personal accounts involve real savings and investment that accumulates investment returns compounding over the years to major estates by retirement. In my recent book, America's Ticking Bankruptcy Bomb, I show that at just standard, long term, market investment returns, an average income, two earner couple investing what they and their employer would otherwise pay into Social Security would reach retirement with close to a million dollars in real terms.

At the same time, such personal accounts would dramatically reduce government spending, because they don't just reduce the growth of Social Security expenditures, they shift them entirely to the private sector. As with both the Ryan and McCotter personal account bills, this would literally involve the largest reduction in government spending in world history. Taxes too, for the accounts could be expanded over time to replace the payroll tax entirely. Gingrich advocated precisely that as a long term goal in his 2010 book, To Save America.

The accounts contribute to economic growth and prosperity today by generating mighty rivers of savings and investment flowing into the economy, creating jobs, increasing wages and income, and boosting production and GDP.

Similarly, for Medicare, Gingrich's Contract provides:

My proposed legislation will offer seniors new choices in Medicare, as well. It will give them the option to choose, on a voluntary basis, either to remain in the existing program, or to transition to a more personalized system in the private sector with greater options for better care. If they select the personalized system, beneficiaries would receive support to cover their private sector premiums. Giving all seniors the option to choose their insurance provider will improve price competition and help lower costs for the program.

That result has been proven with the Medicare Part D program, which helps seniors pay for competing private drug insurance plans. Because of market price competition, the costs of that program have fallen far below original projections. Ryan's controversial Medicare reforms actually just involve expanding the Part D model to all of Medicare.

Seniors would benefit from such reform because they would be empowered to choose their own preferred health plan, and to escape the health care rationing that would result from Obamacare's dramatic cuts in Medicare payments to doctors and hospitals. Seniors would be free to choose instead private insurance that pays market rates for health care, ensuring access to all necessary care.

If personal accounts were extended to the Medicare HI (hospital insurance) payroll tax, seniors would enjoy another stream of income in retirement they could use to cover the health insurance of their choice.

Gingrich expands on those entitlement reforms by proposing to build upon the sweeping success of the 1996 reforms of the old Aid to Families with Dependent Children (AFDC) program, which Congress adopted under his leadership. Gingrich writes in the Contract:

[D]uring my Speakership, we passed the first major overhaul of an entitlement program in American history, with welfare reform in 1996. Under the old system, the federal government gave states a blank check, and often incentivized welfare recipients not to enter the work force. Naturally, spending growth was out of control, and the program did little to alleviate poverty. Our reform changed this: States now only get a fixed amount - a "block grant" - every year, and can design their welfare system however they want as long as they require recipients to eventually enter work.

Gingrich proposes:

There are 184 other means-tested entitlement programs that can be block granted in a similar manner to our reform in 1996. One program alone--Medicaid--could save the federal government over $700 billion in the next decade, according to Congressman Paul Ryan's 2012 Republican Budget. Not only would these programs be more responsive and dynamic on a state level, but Americans would save hundreds of billions of federal tax dollars every year. The 1996 AFDC block grant reforms greatly benefited the poor, because under the incentives of those block grants, within a few years two-thirds of those dependent on the program went to work in real private sector jobs. As a result, their incomes increased by 25% on average, and poverty among them plummeted. Yet, taxpayers benefited enormously as well, because after 10 years the costs of the program were 50% below what they would have been otherwise in real terms at prior trends.

If these reforms were extended to all federal, means-tested welfare programs, these benefits would multiply exponentially. The poor across the board would benefit from increased work and incomes, and greatly reduced poverty as a result. They would gain in particular from Medicaid block grants empowering the states to reform the program to provide assistance to the poor for the purchase of private health insurance of their choice, including Health Savings Accounts. Medicaid so badly underpays doctors and hospitals that the poor face grave difficulties in finding timely essential care under the program. But the private insurance pays market rates to doctors and hospitals. The poor would consequently enjoy the same health care as the middle class because they would have the same health insurance as the middle class.

At the same time, current federal means-tested welfare programs are estimated to cost $10 trillion over the next 10 years. With resulting savings anywhere near the savings from the 1996 AFDC reforms, the reduced spending burden enjoyed by the taxpayers would run in the trillions over the next 10 years alone. Welfare would then be sent back to the states where it belongs. Moreover, instead of taxpayers effectively paying those in the bottom 20% of incomes not to work, as today, those individuals would be paid by private sector employers to work, and thereby contribute to the economy and economic growth.

Finally, Gingrich features as the first priority in his Contract to "Repeal Obamacare and pass a replacement that saves lives and money by empowering patients and doctors, not bureaucrats and politicians." Gingrich explains, "The Obamacare law is unconstitutional, unaffordable, unworkable, and stunningly unfair. It's so-called 'individual mandate' is blatantly unconstitutional and an unprecedented expansion of federal power."

Gingrich displays profound insight into why the individual and employer mandates are so unworkable, writing in the Contract:

Their intractable problem is this: once you have a mandate, the government has to specify exactly what coverage must be included in insurance for it to qualify. This introduces political considerations into determining these minimum standards, guaranteeing that nothing desired by the special interests will be left out. And once the government mandates such expensive insurance, the government becomes responsible for its costs. It has to adopt expensive subsidies to help people pay for the expensive plans that it is requiring. The resulting cost to the taxpayer and strain on the budget leads the government to try and control healthcare costs by limiting healthcare services. The inevitable result is rationing by a nameless, faceless, unaccountable board of government bureaucrats.

These intractable problems arise whether the mandates are imposed by the federal government or a state government. In fact, exactly these disastrous results are playing out under Romneycare in Massachusetts.

Gingrich also displays fundamental insight into the policies that should replace Obamacare, writing:

I will advocate for specific replacement health policies that will create a free market framework for health care, provide affordable, portable, and reliable healthcare coverage, and establish a health care safety net focused on those in need. This system will assure health care for all with no individual mandate or employer mandate of any kind. This alternative to Obamacare begins with patient power and localism and the many common sense ideas developed over the past eight years at the Center for Health Transformation.

These policies adopt the Patient Power framework advocated by conservative health policy guru John Goodman at NCPA in Dallas. That is why Gingrich's reforms include extending:

Health Savings Accounts throughout the entire health care system. Everyone on Medicare should be free to choose an HSA as part of their coverage if they want it. Everyone on Medicaid should be free to choose an HSA for part of his or her coverage. All workers should be free to use their health insurance tax credit or deduction to choose an HSA in place of their employer-provided health insurance if they desire.

The very first paper on Health Savings Accounts, in fact, was co-authored by John Goodman and myself in 1981. Gingrich was a leader in Congress providing for the initial adoption of HSAs in federal law.

Repealing Obamacare would benefit taxpayers by cutting future spending and taxes by trillions. It would help working people and the poor by empowering them with greater freedom and control concerning their own health care, freeing them from centralized government power and control, and the rationing that would involve.

Moreover, they would enjoy a health care safety net costing just a small fraction of the massively overspent Obamacare. That would include the Medicaid block grants and assistance for the purchase of private health insurance discussed above for those too poor to buy such health insurance on their own. It would also include state high risk pools for the uninsured who had become too sick to buy health insurance, providing a place where they would be assured they could find essential coverage and care, with financial assistance to the extent necessary.

In my book America's Ticking Bankruptcy Bomb, I argue that by modernizing our old fashioned, tax and redistribution entitlement programs to rely on 21st century capital, labor and insurance markets instead, we can achieve all of the social goals of these entitlement programs far more effectively, serving seniors and the poor far better, at just a fraction of the current cost of those programs. The new, emerging Republican consensus regarding entitlement reform and social safety nets reflects precisely that.