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March 01, 2013 9:26 AM Why Democrats Must Get Smart on Entitlements

By Jonathan Alter

In a season of depressing budget news, the worst may have been that a majority of U.S. House Democrats signed a letter urging President Barack Obama to oppose any benefit cuts to Social Security, Medicare, Medicaid and other entitlements. That’s the last thing we need.

To hold the line on harmful cuts to discretionary spending, Obama and the Democrats must educate the public about the necessity of entitlement reform. Otherwise, the poor and needy - - largely spared by the automatic reductions under sequestration — will get hit much harder down the road.

Liberals are right to reject Republican proposals that would slash social-welfare programs even as they refuse to consider closing tax loopholes for the wealthy. And I agree that the sequestration will cut into the bone of important government functions and investments in the future.

That makes two more reasons to start talking seriously about how we will pay for the insanely expensive retirement of the baby boomers.

How expensive? Anyone reaching retirement age in the next 20 years (including me) will take more than three times as much out of Medicare as he or she contributed in taxes. By 2030, the U.S. will have twice as many retirees as in 1995, and Social Security and Medicare alone will consume half of the federal budget, with the other half going almost entirely to defense and interest on the national debt. It’s unsustainable.

Saying Goodbye

If Democrats don’t want to talk about these programs, they can say goodbye to every other pet program. We can preserve Medicare in amber only at the expense of investments in prekindergarten programs or cancer research.

To reform entitlements, we should assess what these programs were meant to do in the first place.

For starters, Presidents Franklin D. Roosevelt and Lyndon B. Johnson didn’t call them entitlements. Jimmy Carter’s administration borrowed the term from “Anarchy, State and Utopia,” a 1974 book by Robert Nozick, a political philosopher. “Entitlement” sounds selfish and at odds with the dignity and peace of mind that Social Security and Medicare are meant to provide.

It distorts the animating idea behind these programs, which is social insurance.

FDR didn’t have strong feelings about benefit levels, retirement ages or eligibility standards. He focused on what he called guaranteed return. By that he meant that having paid into the system through a kind of insurance premium (though in fact it was merely a payroll tax), Americans should rest easy that some money would be there for them if they lived long enough to need it. The whole point was “insurance against need.”

“Guaranteed return” and “insurance against need” should continue to be the two guiding principles of social-insurance reform.

“Guaranteed return” means no privatization or voucher system for these programs. FDR would have strongly opposed President George W. Bush’s plan to allow Social Security contributions to be invested in the stock market. He thought subjecting retirement income to what he called “the winds of fortune” was a breach of the social contract. Imagine what would happen to someone who retired in 1929 or 2008? No guaranteed return.

“Insurance against need” suggests keeping the focus on poor and middle-class recipients who depend on the money most. That means means-testing, giving wealthier retirees less. FDR, who favored high levels of taxation on the rich, would have been fine with taxing their benefits, too, as long as they were guaranteed to get at least something back.

Old Argument

Liberals generally oppose means-testing social-insurance programs. For decades they’ve argued that if the wealthy don’t get a heaping portion of Social Security and Medicare, it will undermine the political support of the programs and turn them into a form of welfare. Once that happens, the theory goes, the programs will be ended.

Like the word entitlements, this hoary idea should be retired. Social Security and Medicare are now so deeply in the marrow of the American middle class that they will never be seen as welfare. The question is not whether to reform them, but how.

Roosevelt structured Social Security as an insurance program with “contributions” through the tax code “so no damn politician can ever take it away.” He didn’t specify anything about the level of taxation or cost-of-living increases, which weren’t an issue in the 1930s but would become one shortly after World War II.

Today, only the first $110,000 in income is subject to the 7.65 percent tax that pays for Social Security and Medicare. Lifting the cap to higher income levels (say $250,000 or $400,000) could eventually generate hundreds of billions of dollars.

Republicans consider this a tax increase. That’s only true outside the context of these programs. The change could be structured so that no one paid in more than actuarial tables say they would take out. That would still raise billions and be consistent with the idea of paying for your own retirement if you can afford it.

For lifting the cap to have any chance, it would have to be matched by reforms such as adopting the chained consumer-price index, a new way to measure cost-of-living adjustments that Obama apparently favors. Liberals oppose chained CPI because it would theoretically result in lower benefits. But less frequent cost-of-living increases aren’t the same as cuts, especially if the current system is, as many experts believe, based on an inaccurate assessment of inflation.

Maybe there are better ideas for reforming social insurance. The point is, we better start talking about them. Otherwise, grandpa and grandma and their fellow Grateful Dead fans are going to eat all the food on the table.

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Jonathan Alter , a columnist for Bloomberg View, is the author of "The Promise: President Obama, Year One." He is a contributing editor at the Washington Monthly.
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Comments

  • ClearEye on March 01, 2013 5:41 PM:

    Sad to see Alter succumbing.

    The most important thing the Federal government could do on health care is to more toward reducing costs throughout the system, using methods like those in the ACA.

    To make Medicare affordable, allow Medicare to take competitive bids on pharmaceuticals, something it is prevented by law from doing today (this is estimated to save $500 billion over the next 10 years). Similarly, other things that Medicare pays for, such as devices and equipment, could be purchased competitively, putting downward pressure on prices throughout the ''system.''

    Outrageous health care costs are a stone around the necks of the American economy and the American people. Reducing them not only relieves pressure on public budgets, but importantly, frees resources in the private economy for more productive uses.

  • somethingblue on March 02, 2013 2:05 PM:

    "We can preserve Medicare in amber only at the expense of investments in prekindergarten programs or cancer research."

    Dude, that's not the deal on the table. The options before us are:

    1) Preserve Social Security and Medicare.
    2) Cut Social Security and Medicare to fund tax cuts for rich people.

    Pretty clear which option you're for.

  • Doug on March 02, 2013 5:07 PM:

    I understood that my generation (the "boomers") constitute a larger-than-usual number of retirees. In other words, once we boomers are gone, the need for Medicare services, in proportion to the overall population, will decline. So, one would think, would the costs for providing less Medicare services - even allowing for inflation. Allowing Medicare to negotiate drug prices would also extend its' solvency.
    Social Security? Raise the earnings cap to $400,000 which is, apparently, the new upper edge of "middle class". Apply that 7.65% to ALL "unearned" income as well. Besides providing much needed income for the Trust Fund, that latter move would also insure against those who manage to blow their inheritances, keeping them from becoming a further burden on society.
    Finally, before worrying about any form of means-testing, why not concentrate on insuring that those who provide the labor to produce goods or the varied services associated with selling those goods, actually receive their fair share of any company's profits?
    Unions used to help in that, but I don't see how we can return to 30+% union membership today. What we CAN do, is ensure that companies are faced with the stark choice of paying 70+% marginal rates on profits, regardless of how those pre-tax profits are distributed by the company; ie, exhorbitant CEO pay or increased dividends or instead, employing those profits as a business expense and spread some (most?) of the earnings around by increasing wages and salaries and thus allowing employees to not be so dependent on SS while simultaneously reducing the tax burden of the company.
    You may have bought into the Republican idea that this country can only provide left-overs or table-scrapings from the economy for those not a member of the 1%, but I haven't. Had we run the economy for the benefit of the majority of the citizenry since 1980, as we did for the previous 50 years, we wouldn't be in this mess today.

  • Slideguy on March 02, 2013 6:50 PM:

    Garbage. Every other civilized country has similar guarantees for their citizens. The reasons ours are so expensive simply boil down to greed. The health care lobby has seen to it that our government can't use the size of our market to bargain down the overly extravagant costs of drugs, equipment, the get-rich-quick mentality of high-end doctors and the incredibly extravagant compensation of the hospital administrators.

    This is not an accident. It was planned.

  • Tom Marney on March 02, 2013 9:21 PM:

    And, on top of everything else, the Dems get tagged as "the party that cut Medicare."

    The real answer is to promote full employment, and thereby generate more in taxes. that and do everything we can to reduce healthcare costs (as opposed to government expenditures on healthcare).

  • Captain Dan on March 03, 2013 10:03 AM:

    The richest country in the world does not need to forsake its elderly. What is needed is to reduce the gop (sic) to a permanent minority party and tax the rich at a fair amount.

  • iyoumeweus on March 03, 2013 12:12 PM:

    This is bull turkey and crazy talk! Make the payment above $100,000 progressive and apply it to all income made within a year regardless of sources. It might look something like this:. SOCIAL SECURITY Change the pay roll tax by reducing it from 6 to 5 per cent on the first $100,000 which would be matched by the employer then a graduated upward tax on all earnings (gross income) above that amount.
    The first $100,000 5%
    $100K 1M +1%
    $1M - 5M +2%
    $5M - & above +3%
    Everything paid above the first $5,000 would be a tax deduction. In other words a person making one million dollars would pay $5,000 on the first $100,000 and $9,000 on the remaining $900,000 for a total of $14,000. Someone fortunate enough to be making $10,000,000 would pay $5,000 plus $9,000 plus $80,000 or 2% on the next $4M and $150,000 or 3% on the final $5M for a total of $244,000 or 2.44% of earnings of which $239,000 would be tax deductable.


  • Rich on March 03, 2013 12:34 PM:

    Alter plays wonk here and acknowledges the insurance component, but doesn't acknowledge the many other entitlements that can be trimmed, like the etx breaks for and cheap fees for minearal extraction. He's just another Beltway insider and from that perspective someone to chide, but ultimately ignore.

  • gdb on March 03, 2013 3:10 PM:

    It's sad, really. Alter had part of his forebrain removed some years ago because he believed that it would avoid his making dumb assessments later on -- that to cure would require removing other parts of his brain later on. Too bad it didn't work.

  • dabba on March 03, 2013 4:56 PM:

    "Cut now or we'll have to cut later"

    What's wrong with cutting later (if it even comes to that)? Why shouldn't we avoid cutting benefits for as long as possible? If your employer gave you two choices: a) they'll cut your pay in 25 years; or b) they'll cut your pay now, and it will remain at that lower level, which would you choose?

    BTW, 25 year projections are ridiculous exercises inherently.

  • Crissa on March 04, 2013 12:35 PM:

    Why is a program that pays for itself on the books?

    Why must we choose to reform insurance against need and not Defense, for instance?

    It's a false dilemma.