Over the next decade, U.S. citizens will be confronted with some difficult choices regarding our entitlement programs. The trust funds created to support Social Security and Medicare will be exhausted. When the trust funds are exhausted, these programs will shift to a cash basis and benefits may be reduced. But, as the federal government continues to incur deficits and accumulate debt at an unsustainable rate, that option is closing.
The viability of our entitlement programs in the long term will require some combination of benefit reductions and/or increased contributions. Failure to enact these reforms means that the country will drift from one year to the next until financial markets signal that financing entitlement programs with more debt is no longer feasible. Legislators have failed to address the flaws in our entitlement programs.
The only way to avoid a financial market meltdown is to enact reforms. The precedent for these reforms is the debt brakes enacted in Switzerland. Debt brakes were first enacted at the municipal and cantonal level in Switzerland. What triggered these reforms was a very important judicial decision. When a municipal government failed to pay its bills, it filed an appeal in the Swiss courts for a bailout from its cantonal government. The Swiss courts ruled that under the Swiss Constitution, the cantonal government was not responsible for the debts incurred by the municipal government.
With this court decision, all levels of government in Switzerland are held responsible for their own budgets and cannot be forced to bail out another government. The bailouts used to prop up profligate governments were ruled to be unconstitutional.
Without recourse to bailouts from cantonal governments, each municipal government was forced to enact reforms to bring its budget into balance and reduce debt. Municipal and cantonal governments enacted new fiscal rules that impose a debt brake and require a balanced budget.
In 2003, a debt brake was enacted at the federal level through a referendum with support from 85 percent of Swiss citizens. At the federal level, the government is required to balance the budget over the business cycle. Since then, the Swiss have reduced federal
debt as a share of GDP by roughly half to about 30%. With these debt brakes in place at all levels of government the Swiss have eliminated bailouts.
The Swiss enacted separate rules for their entitlement programs. The new rules require that the Social Security System be in actuarial balance. If the System is not in actuarial balance, adjustments are automatically made, i.e., benefit levels reduced and/or contribution rates increased to bring it back into balance. The Swiss social security system has been in actuarial balance every year since the new rules were enacted.
The Swiss have encountered problems in other entitlement programs and citizens have used direct democracy to solve these problems as well. Their Disability Insurance program continued to incur deficits after the new fiscal rules were enacted. In 2009, Swiss voters approved a temporary increase in the value-added tax with revenues earmarked for the Disability Insurance program.
There are several reasons why this solution to the deficit problem in the Disability Insurance programs was successful. The law was enacted as a referendum with support from a majority of Swiss voters. The funds generated by the increased value-added tax were earmarked for the disability Insurance program and could not be used for other purposes. The increase in the value-added tax was limited in time over seven years (2011-2017) and expired automatically unless re-approved by citizens. The government was prohibited from making the tax increase permanent.
It is important to emphasize that these reforms were enacted by Swiss citizens using the tools of direct democracy. Through initiative and referendum, Swiss citizens enacted new constitutional fiscal rules to impose fiscal discipline at all levels of government and mandated reforms required to maintain viability of their social security system. They did not wait for elected officials to address the problem.
It is time for U.S. citizens to follow the lead of the Swiss and not rely on our elected officials to solve the coming crisis in our entitlement programs. Citizens can use the petition process to incorporate new fiscal rules in the Constitution mandating budget balance and limiting debt. With a hard budget in place, legislators would have to enact reforms in government programs, including entitlement programs. New fiscal rules for Social Security and Medicare would mandate automatic adjustments in benefit levels and contribution rates to bring these programs into actuarial balance. Rules-based entitlement programs can maintain that actuarial balance in the long term, as the Swiss have demonstrated.
Barry W. Poulson is professor emeritus at the University of Colorado, Boulder, Colorado, and on the Board of the Prosperity for US Foundation