The Road to Freedom (21 page)

First
, the retirement age is absurdly low. Unless you are in a heavy physical industry or have a health issue, why should you retire at 65? You'll still be in your prime. The U.S. should gradually raise the retirement age to age seventy by 2065, indexed to longevity (meaning that the retirement age will continue to increase as people live longer, which no doubt they will).

Believe it or not, the retirement age for receiving benefits has only increased by one year (from 65 to 66) since the system was founded in 1935. In 1935, the average man living at age 65 would survive an additional 12.7 years, and the average woman, an additional 14.7 years.
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Now those numbers are 18.7 and 20.8 years, respectively. In addition, more people retire early today than they did when Social Security started. It is not hard to see why the system is unsustainable.
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People live longer and better lives today and can work productively for more years. Social Security should reflect this fact.

Second
, index benefits to price inflation because that is what matters when it comes to maintaining seniors' standard of living. The government currently raises benefits on the basis of wage inflation, which is higher than price inflation. This doesn't make sense, because Social Security is intended as a way to support the elderly, not as a salary reflecting the increasing productivity of current workers. By making this small change, the U.S. would save $7.6 trillion over seventy-five years.
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Third
, gradually adopt means testing and reduce benefits for earners whose incomes are so high that Social Security is not a major part of their retirement income. This recognizes that the safety net is not intended to provide benefits to people who are not in poverty and moves America away from a system in which middle- and upper-class people become dependent on the government for retirement income they could and should generate on their own. A few nondraconian changes (lowering spousal benefits slightly and reducing the percentages of wages that Social Security replaces for high earners, for example) would save about $3.2 trillion over seventy-five years.
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Together, these reforms would keep the current Social Security system solvent in perpetuity without raising the cap on contributions or raising the payroll tax rate.

If making major changes, however, why not build a whole new system? Imagine a system that is cheaper than the current one, is not in danger of insolvency, better protects seniors, and is not a kind of welfare for the middle class.
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What would that look like?

To begin with, as with the reforms I have already described, the U.S. would need to raise retirement ages to reflect the happy reality that people are living longer, healthier lives. People should be given a positive incentive to work longer through the elimination of the Social Security payroll taxes for individuals aged sixty-two and over
and of the “Social Security Retirement Earnings Test,” which lowers Social Security benefits to workers if they earn money.

In addition, we should give people ownership over their retirement savings, instead of putting them into the government “trust funds” that are systematically raided by politicians. All workers age 55 and younger should be enrolled in an actual retirement savings account funded by 5 percent of a worker's earnings (2.5 percent from the individual and a matching 2.5 percent from the employer). This would be like a universal IRA account and would supplement workers' own voluntary retirement savings. It would be owned and controlled by the individual.

Next, all seniors should be guaranteed a standard of living above poverty. It is shocking to think that, with all the U.S. currently spends, it still hasn't managed to care adequately for all senior citizens.
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A basic income supplement could provide enough income to bring all low-income seniors to above the level of poverty (provided they use it wisely), paid for with a tax on wages well below 6 percent. This would be an actual safety net and would cost about 60 percent of what the U.S. currently pays for Social Security.
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These simple reforms would achieve the four things America needs from the Social Security system: solvency, keeping the elderly out of poverty, ensuring that people save something for their retirement, and giving citizens—not politicians—control over retirement savings. And by keeping costs manageable, the reforms will ensure that Social Security is around for future generations.

SOCIAL SECURITY
is only one of the bloated entitlement programs that threaten America's future. Medicare (providing health care for seniors) and Medicaid (providing health care for the poor) are
arguably much bigger problems. Medicare in particular has been expanding faster than any other area of government, growing by 180 percent in real dollars from 1990 to 2010.
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Medicare and Medicaid are out of control not just because of high inflation in health costs but because the government has made open-ended commitments to citizens, regardless of cost. Imagine trying to operate a supermarket where “members” pay a low monthly fee and are then invited to take anything they “need” off the shelf. That's more or less the Medicare and Medicaid model.

Let's start with Medicaid, which is intended to give the poor medical coverage. The states administer Medicaid, with a subsidy from Washington. The federal government currently matches state dollars spent on the program, at a rate of between one-to-one and three-to-one (depending on the state). So if Arizona, which receives a 2.06:1 match, spends $1,000 treating a poor person, it gets $2,060 from the federal government. There is no limit on federal support—the more Arizona spends, the more the federal government spends. Arizona (and every other state) has the incentive to expand Medicaid programs wastefully, because the federal government is picking up the tab. Every dollar Arizona spends means $3.06 in total health care expenditures.
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Not surprisingly, states are offering Medicaid services to more and more people—and not just poor people. Take the case of New York. While that state's poverty rate is 14.2 percent, 27 percent of New Yorkers in 2009 got their health care through Medicaid, costing federal taxpayers $29.3 billion.
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Simply put, the federal government makes it too economical for New York—a traditionally liberal state prone to extravagant government spending on social services—to offer Medicaid to too many people who are not poor.

There is a relatively straightforward solution to this problem: Provide the federal subsidy as block grants to the states—that is, send the states checks for the year's total federal allotment—and let them use it as they see fit. If New York wants to be profligate and overspend, it can do it with its own money, not with unlimited federal tax dollars coming from places like Kentucky and Texas. States would have the incentive to economize and innovate within a fixed budget, just as private companies (and all individuals) do.

While excessive expenditure on Medicaid poses a major budget problem for America, Medicare is even worse. The program guarantees
unlimited
payment for the health-care costs for the rapidly growing population of seniors. The CBO projects that Medicare spending will grow from $521 billion in 2011 to $725 billion in real (inflation-adjusted) dollars in 2020, a growth rate 3.3 percentage points higher than inflation.
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If no changes are made to the current law, Medicare spending will be gobbling up 5.9 percent of American GDP by 2035.
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Runaway Medicare spending occurs because the system treats seniors the same way the Medicaid system treats states; it takes away any incentive for people to live within a budget. Predictably, nobody does. Without reform, Medicare will almost singlehandedly bankrupt the country.

To fix the system, two things are needed: Keep people in the workforce (and on private insurance, if possible), and move away from guaranteeing unlimited health benefits without regard to cost.

First, the U.S. should gradually raise the age for receiving Medicare benefits to sixty-seven. This is a minor change that no reasonable person can deny makes sense, looking at the improved health of seniors in the past decades. Government disability
benefits will still be available to those who need them. Also, the Medicare payroll taxes for individuals aged sixty-two and older should be eliminated so there are better incentives for older Americans to work.

Second, the U.S. must move away from “defined benefits” (where the government guarantees unlimited services) to “defined contributions” (where the government guarantees a certain level of insurance coverage). Your employer most likely provides health benefits to you. That means they guarantee they will make insurance payments on your behalf (which are defined contributions), not pay all your medical bills (which would be defined benefits). The government needs to use this kind of model as well. There is no other way to contain costs.

Each senior citizen should be guaranteed a fixed payment adjusted for age, income, and health status. This payment would go into an individual account, from which seniors would pay for health insurance provided by private companies that guaranteed certain minimum coverage levels. Seniors who wanted generous “Cadillac” health care plans could have them, provided they were willing to pay the difference out of their own pockets. Those who chose more cost-efficient plans would get to keep the savings. This would cap the government's exposure and encourage seniors to make cost-effective insurance decisions according to their desires and needs. The Federal Employees Health Benefits Program works this way, so it would not be a radical departure from government procedures.
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To reiterate the central point: If politicians do just one thing to help get America's fiscal house in order, it should be entitlement reform. And if there is just one entitlement reform, it should be Medicare. Without this single reform, nothing else will solve our debt and deficit problem.

Some believe that taxation is a dry topic with no moral significance, but nothing could be further from the truth.

The current tax system is hobbling American free enterprise. It penalizes earned success by taxing productive activity at rates that are internationally uncompetitive. It unfairly picks winners and losers in the economy with thousands upon thousands of special deals and loopholes for well-connected companies and individuals. It weakens American citizenship by exempting half the working population from paying any federal income taxes.

The status quo system is confiscatory, unfair, needlessly complex, and at odds with all of the elements of a moral system. Major tax reform should be a top priority for reasons that extend well beyond simple economic efficiency.

We have already looked at a number of the disheartening facts about our tax system, but here are the key ones to remember in any debate:

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Although two-thirds of Americans believe that everyone should be required to pay some amount to fund the government, in 2011, 46 percent of households had zero or negative federal income tax liability.
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Even when payroll taxes are added in, 28 percent of households had zero or negative federal tax liability.
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In 2010, before any of President Obama's policies were implemented, 60 percent of families received more from the government than they paid in taxes. That number is inching toward 70 percent, as the president pushes through various pieces of his agenda.
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The complexity of the system has significant costs. Americans spend 6.1 billion hours a year in preparing their personal taxes.
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The cost of complying with the individual and corporate income taxes in 2008 amounted to $163 billion, or more than $500 per person.
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The U.S. top combined corporate tax rate, which includes both federal and (average) state taxes, is 39.2 percent, the second highest in the industrialized world.
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Figure 7.4
. While other developed countries have lowered their corporate tax rates, the U.S. rate remains uncompetitively high. (Source: OECD Tax Database. Available at
www.oecd.org/ctp/taxdatabase
. Note: The rates shown are the top statutory combined corporate tax rates. The average of developed countries represents the OECD average.)

In thinking about how to reform the tax system, there are four principles to keep in mind.