The American Spectator

Entitlement Reform Without Tax Increases br> To achieve successful, positive, entitlement reform, again we must think outside the box of our current entitlement programs, and promote reforms that thoroughly restructure and modernize these programs, rather than packages of tax increases and benefit cuts. The key is to bring in much greater roles for highly productive modern capital and labor markets to serve the goals of these programs. Reformers have to recognize that voters are going to insist upon sturdy safety nets remaining in place. But with positive, pro-growth, structural reforms and the broad benefits of capital and labor markets, we could maintain such safety nets and actually serve the beneficiaries and the social goals of these programs far better, with far less in government spending. /p>

Those reforms would consequently not only be politically feasible, but potentially quite popular. This is where conservatives and free market advocates should be focusing their energies.

One key concept for such positive, structural, entitlement reform is personal accounts for Social Security, where workers would be free to choose to substitute savings and investment accounts for at least part of the current system. These accounts are especially powerful in reducing government spending because they don’t just trim the growth of such spending. They would shift huge chunks of it from the public to the private sector, dramatically reducing Federal spending over the long run.

The accounts can start at any size, and then can be expanded over time until workers can choose to substitute the accounts for all of their Social Security retirement benefits. The accounts could be expanded further, eventually substituting private life insurance for Social Security survivors’ benefits, and private disability insurance for Social Security disability benefits. Eventually, the accounts could be expanded to cover the payroll taxes for Medicare, with the saved funds financing annual annuity benefits that would be used to purchase private health insurance in retirement. Such fully expanded accounts would reduce Federal spending by about 9% of GDP, as the personal accounts replace this spending with market-financed benefits. Such spending reductions would involve an unprecedented, historic achievement.

In the process, the payroll tax would ultimately be phased out completely, and replaced with an engine of personal family wealth in the personal accounts. Workers would get much better benefits through these accounts because market investment returns are so much higher than what the non-invested, purely redistributive, Social Security system can even promise, let alone what it can pay. Workers across the board would accumulate several hundred thousand dollars in real terms by retirement, directly owned by each worker, which can be left to the family at death. This would do far more to reduce inequality than anything else, yet do so in a way that reinforces rather than undermines the economy. Indeed, done right, such reform would produce an historic breakthrough in the personal prosperity of working people.

The bill introduced in the last Congress by Rep. Paul Ryan (R-WI) and Senator John Sununu (R-NH) serves as a comprehensive model of how to structure such accounts, with substantial input from the Social Security Administration itself and from experienced Wall Street fund administrators on how to make the concept workable. That bill also maintained the current social safety net in full, by including a federal guarantee that if any retiree’s account cannot pay at least what Social Security would under current law, the federal government would pay the difference.

p> Block Grant Welfare to the States br> A second key concept for positive, structural entitlement reform is block grants back to the states for the remaining Federal welfare programs. Legislation enacted in 1996 block granted the old Aid to Families with Dependent Children (AFDC) program back to the states. The share of Federal spending on this program was returned to each state in a block grant to be used in a new program designed by the state based on mandatory work for the able bodied. The key is that the block grant is finite, not matching, so it does not vary with the amount the state spends. If the state spends more, it must pay for the extra costs itself. If the state spends less, it can keep the savings. /p>

The reform was shockingly successful, with the old AFDC rolls reduced by close to 60% nationwide, close to 80% in states that pushed work most aggressively. Requiring able-bodied recipients to work for their benefits eliminates the old welfare work disincentives. But probably even more important are the reversed incentives for state administrators. Previously, the Feds matched increased state spending, so each new welfare dependent signed up brought more federal funds to the state. But with the state now paying all added costs, the focus has changed to getting recipients out to work.

These same reforms should now be extended to the other Federal welfare programs, particularly budget busting Medicaid. Even if the reform allowed each state to keep all of its savings from greater flexibility, positive incentives, and reduced rolls, and Federal spending on the block grants was just not increased, the reform would save the Federal government a trillion dollars over the first 10 years.

Such block grant reforms should be expanded to Food Stamps, Federal housing assistance programs, and other, smaller Federal welfare programs as well. The new state programs created with these block grant funds can be focused on getting beneficiaries into real, private sector jobs, market health insurance, and ultimately even home ownership. The result would be a much better overall safety net system for the poor, providing a new, historic opportunity to end poverty.

Instead of supporting reform commissions composed of Washington insiders with no ideas, or budget process reforms with automatic tax increase triggers, conservative reformers should be working directly for the above fundamental entitlement reforms, which would dramatically reduce Big Government, while still appealing broadly to the general public.