Stephen Moore & Peter Ferrara
The Road From Serfdom
David N. Bass
The Millennial Perspective
When the Soviet empire collapsed 25 years ago, many believed that the battle for liberty and limited government had been won. It was only a matter of time, they thought, until America’s centrally planned welfare state would give way to a more rational system based upon competition and citizen choice in areas such as education, health care, and retirement planning. They were wrong. Government has continued to grow at all levels in the United States since the Iron Curtain and the Berlin Wall came down, consuming more resources, imposing ever more burdensome regulations on business, and running up unprecedented levels of debt. While our leaders cheered the collapse of socialism abroad, they still supported highly centralized government programs at home.
This year the federal government will spend $3.8 trillion, about 25 percent of the nation’s real Gross Domestic Product, and will borrow around $1.3 trillion, much of it to cover the exploding costs of three large entitlement programs, Medicare, Social Security, and Medicaid. Federal spending has doubled since 2001, while the nation’s GDP has grown by less than half. As a consequence, the gross federal debt has more than doubled in the past five years to nearly $16 trillion, a figure that exceeds the annual output of the entire U.S. economy. Many economists warn that countries that allow their affairs to cross this fiscal barrier—when debt tops GDP—place themselves at great risk for runaway inflation or a credit crisis of some kind. Given the direction of events, Americans may soon face a choice between living under a European-style welfare state with the high taxes and loss of freedom it would entail or returning to a system of smaller but effective government based upon traditional American principles of freedom, choice, and individual responsibility.
This issue of The American Spectator is dedicated to clarifying the choices facing the American people and demonstrating how the principles of choice and competition can be marshaled to place our entitlement programs on a sustainable financial foundation while allowing citizens the flexibility to adapt them to their personal circumstances. The reforms outlined in this symposium are fundamental and far-reaching. If adopted, as they eventually must be, they will take the nation off its dangerous fiscal path and restore the faith of taxpayers and creditors that its bills will be paid and its promises kept. And if they are not adopted—well, we know what has happened to countries that have waited too long to put their fiscal houses in order.
The editors are honored to open the pages of The American Spectator to the ideas and recommendations of Rep. Paul Ryan, whose essay on Medicare and Obamacare should be must-reading for every concerned citizen. Rep. Ryan is a public servant of unusual vision and fortitude who has wagered that the American people will make the hard choices if their leaders will only level with them. He has certainly taken fire for speaking hard truths. Many will recall that last year President Obama, the nation’s elected leader, held back his recommendations on the budget until Republicans in Congress went first, thinking he could gain political advantage by criticizing their proposals. Rep. Ryan and his colleagues, undaunted by this challenge, proceeded to outline their far different approach to taxes and spending in order to ignite a badly needed debate on the nation’s fiscal future. That debate over taxes and entitlements is now joined, thanks in no small part to Rep. Ryan’s leadership. His essay below is an important volley in a debate that is bound to take center stage in this year’s election campaign, and which will continue until the underlying issues are finally resolved.
The symposium contains two additional essays by authors who are similarly active and influential in their respective fields. Stephen Moore and Peter Ferrara, prolific and indefatigable proponents of free markets and limited government, are the authors of a Hayek-style essay titled, “The Road From Serfdom,” which contains a novel proposal that citizens be allowed either to remain in existing entitlement programs or to opt out in favor of alternatives of their own design. Their proposal would set up a practical experiment in which citizens could “vote with their feet” either in favor of or against existing programs. As the authors say, Americans do not trust politicians of either political party with their health care or retirement plans, and would far prefer to exercise those choices themselves.
David N. Bass is an eloquent spokesman for the rising generation now being asked to foot the bill for the exploding costs of Social Security and Medicare. His essay, “The Millennial Perspective,” demonstrates how the introduction of personal accounts into Social Security would both save the system for current retirees and preserve an economic future for younger workers. The Millennials, as he says, are cynical about the politics of entitlement spending: they fully expect that these programs will be insolvent by the time they reach retirement age. This need not be so. Millennials have sufficient political muscle to force necessary reforms, if they would only exercise it. Mr. Bass’s mission is to galvanize them into action.
The united states is the “choice” country par excellence, founded as it was in a Declaration of Independence that proclaimed liberty and equal rights for all, and castigated the British King because he erected “a multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance.” For four centuries people in other lands have made the choice to embark upon a dangerous journey to reach these shores to find freedom and opportunity. As new immigrants arrived, those already here pushed westward on horseback and in wagons in search of free land, taking on enormous risk and hardship as they did so. Most of this was accomplished by individuals and groups acting on their own; very little of it was supervised by government. The great exception to the story of free settlement was that of African slavery and of a people brought here against its will to work for others. Americans rightly regard this as a blot on their history, but it should not be forgotten that they fought a civil war to eliminate it.
The epic story of the United States is one of unprecedented expansion and development according to principles untried in other parts of the world or even in the history of mankind. Few could have envisioned that a small country of three or four million souls bottled up along the Atlantic seaboard would expand within two or three generations to occupy all the land between the Atlantic and Pacific Oceans; or that it would evolve a few generations after that into a population of more than 300 million and the most prosperous nation on earth. Americans were the first to take Adam Smith’s basic teaching to heart: that free people, exchanging freely with one another, make the world better for all.
Many Americans are properly concerned that the principles that built their country are eroding before their eyes. The entitlement state undoubtedly undermines self-discipline and individual responsibility. Some estimate that more than half the households in the country receive benefits from government in one form or another. At the same time, fewer than half of those households pay federal income taxes, a trend that is accelerating as more people seek benefits and fewer pay taxes. We are reaching the point, and may have reached it already, at which there are more people riding in the wagon than there are pulling it forward.
Most Americans reject this indictment for recipients of Social Security and Medicare, because they understand these to be insurance programs into which people contribute during their working years and from which they draw benefits when they retire. It is true that since the establishment of Social Security in 1935 and Medicare in 1965, the government has tried to sell them as insurance programs in which contributors have individual accounts. The elderly protest cuts in these programs in the belief that something they own is being taken away. In fact, there are no such individual accounts in Medicare or Social Security, and no funds set aside from which participants can withdraw at retirement. These are “pay as you go” systems in which taxes from current workers are used to pay benefits for current retirees, with an implied social contract that current workers will eventually receive benefits courtesy of taxes paid by the next generation of workers. They are called entitlements, because anyone who has paid into the system or who meets defined legal requirements has a right to receive benefits.
Over the decades Congress has steadily increased the benefits under Social Security and Medicare such that annual expenditures to fund them have grown almost to the breaking point. In 2012 the U.S. government will spend nearly $1.4 trillion on Social Security and Medicare, plus nearly $300 billion to cover the federal share of Medicaid. This total of $1.7 trillion represents 45 percent of the federal budget and about three times as much as we spend on national defense. The expenditures are growing at rates that far outstrip annual growth in the economy as a whole. Payroll taxes have steadily increased to cover rising costs. When Social Security was established in 1935, it was funded by a payroll tax of 1 percent on employees and employers; by 1970 that tax increased to 4.2 percent and by 1990 to 6.2 percent. The payroll tax for Medicare has increased more than four-fold since it began in 1965 and will increase substantially again for higher income taxpayers under the provisions of the new health care law. The average worker now spends between $7,000 and $10,000 per year to fund these two programs, if the employer’s share of the tax is included as part of the cost of maintaining his or her job.
Nevertheless, these higher taxes never catch up with rising expenditures. As Democratic congressman Kurt Schrader of Oregon writes, “In just a few decades, Social Security, Medicare, and Medicaid, and other mandatory spending programs will eclipse our entire budget.” One cause of this is the impending retirement of the “baby boom” generation, an unfolding process that will shatter the demographic assumptions upon which these retirement programs have been based. There are currently about 45 million people receiving Social Security and Medicare benefits against a work force of about 130 million. This ratio of about 3 workers per recipient has steadily declined over the years due to demographic changes in American society. There are between 75 and 80 million “baby boomers” born between 1946 and 1964, the leading edge of which reached retirement age in 2011. By 2025, when the vast majority will have reached age 65, there may be as many as 75 million Americans receiving benefits.
In the meantime, as boomers leave the work force, fewer Americans will be joining it. Thus it is possible, and perhaps likely, that in 10 or 12 years we will face a situation in which some 70 million people are drawing benefits from a working population of 135 or 140 million. At this that point something will have to give: either taxes will have to be raised or benefits substantially cut.
One might ask why our government has not prepared for a development that has been foreseeable for decades. After all, the baby boom generation did not just wander out of the maternity ward recently to everyone’s surprise. Far from preparing for this event, our government has taken several steps that have made the problem even more acute. In 2003, Congress passed an expensive new prescription benefit under Medicare and included no way to pay for it. In 2009 President Obama, supported by a Democratic Congress, signed a new entitlement program to guarantee coverage for the 40 million or so Americans without health insurance, but paying for it by taking $50 billion per year out of Medicare, thus further stretching a system that was already on the path to insolvency. In addition, the U.S. government has taken annual surpluses from the Social Security Trust Fund and applied them to deficits in the overall federal budget. These funds, which amount to about $3 trillion, will have to be repaid out of general tax revenues thereby placing even further strains on the national budget.
As Rep. Ryan points out, many in Congress will be tempted to hold down the cost of Medicare by imposing price controls on medical services and by rationing care to seniors. This is not a path that Americans will accept, nor is it one that our political institutions are capable of following. Americans are used to exercising choice in their lives and control over vital decisions. Efforts to deny life-saving care will generate protests and calls for Congress to override those decisions. The press will play its usual role in sensationalizing these dilemmas. Insiders will seek special treatment and exemptions from the rules, and in the process they will discredit any regime of rationing in the eyes of the public. It cannot be done in America, and ought not be tried.
The problems facing us seem daunting, as indeed they are, but they are of our own making and are largely political in nature. Fortunately, there are ways to avoid breaking promises to seniors, bankrupting younger workers, or raising taxes at the expense of economic growth. As the authors in this symposium demonstrate, the solution lies in giving Americans greater choice in the uses of the funds they contribute each year to Social Security and Medicare. There are various ways, as they suggest, to implement a regime of choice that both upholds the promises made to those near or beyond retirement age and opens up opportunities for younger Americans just entering the work force. It is to be expected that an approach based on choice will be attacked by those stubbornly attached to the existing ways of doing things, but we have obviously reached a point where there is little alternative but to look for new solutions. The editors of The American Spectator are pleased to publish this collection of essays as a means of moving the debate forward, and will plan on returning to it in future issues of the magazine.