Entitlement Reform: If not now, when?
by Lawrence Grello

[Note from SWANS: Lawrence Grello is running for Congress in 1998 as a Republican. Readers may find more of his thoughts on the following websites: http://www.geocities.com/CapitolHill/5291 and http://nni.nni.com/~lgrello. The content of this column represents his views and does not necessarily reflect the views of SWANS and its core group of contributors.]

The Problem: Currently, the federal government spends roughly 50% on entitlement programs (Social Security 22%, Medicare 10%, Other Entitlements 8%, Medicaid 6%, and Welfare {AFDC, Food Stamps, etc.} 3%). The interest on the National Debt is roughly another 15-20%.

As we enter the next century, we are faced with the crisis of Medicare and Social Security going broke (Medicare is scheduled to go broke in the year 2001 and Social Security is scheduled to go broke in 2029 {this number has been revised seven times; it was said in the 1980s that social security system would be solvent until the year 2051}).

What is one of the main reasons for this?

People are living longer than calculated when these programs were first implemented.

In 1935:                          Today:

Retirement age: 65 65 for full benefits Average Life Expectancy: 60 76 FICA tax on employee: 0.5% 7.65% FICA tax on employer: 0.5% 7.65%

If we do nothing:

(1) The system will go broke and/or FICA taxes will be raised sharply! Some studies show entitlements will take 100% percent of the federal tax revenues collected in the year 2030 (or as early as the year 2020) based on growth and spending trends (Where does that leave spending on education, environment, national defense, etc.?) . What do you think will happen to tax rates then?

People from different party ideologies have talked about the effects of government growth on the future of America. When a child born today enters the work force, over 80% of their wages will go to pay some form of taxes if we do not control the growth of government spending. If this happens, it will result in a much weaker America competing in the growing global economy. I believe it will contribute to more jobs going overseas (obviously due to the fact that it will probably be much cheaper to produce goods and services elsewhere and weaken the buying power of America consumers).

How competitive do you think America goods and services will be in the global economy with taxes at this higher level? How many jobs will this cost American workers? Today, the average worker pays almost 40% in some form of taxes. That figure will only continue to rise with the policies of the status quo.

The time for real reform is now! We can't afford to keep raising the tax rates (whether it's the income tax, FICA tax, or some other tax). This is a "ponzi" scheme on the young of America.

The Responsible and Reasonable Solutions I would support (Common sense reforms to preserve/protect an elderly benefit system that can be viable for the baby boom generation and beyond):

(1) The federal government needs to raise the retirement age one year every two years until at least the age of 70 {Obviously, the people who cannot work (e.g. Physical reasons) should be eligible for welfare (Isn't that what welfare and Medicaid were intended for?).

(2) Social Security should be means tested. A system that is going broke should not be paying out benefits to rich retirees who have a large retirement income. I support means testing on payouts and COLAs (cost of living adjustments).

(3) The Social Security and Medicare Trust funds should be in higher yielding investments (e.g. high rated state and local revenue bonds) instead of being used to hide the size of the federal deficit (through government IOUs). However, this should only be done when the budget can be balanced without using the social security surplus. Otherwise, there would be upward pressure on interest rates (this is one of the reasons why I believe the latest suggestions to put the social security surplus in the stock market is a bad idea).

(4) The Social Security system should be phased out over 50-60 years and be replaced with a privatized (or semi-privatized) system that allows a portion (eventually all) of today's younger workers (e.g. under 35 or 40) FICA tax to go into their own privatized accounts where they can decide on the way it is invested (similar to a 401K plan).

(5) The CPI (Consumer Price Index) needs to be adjusted to accurately reflect the rate of inflation. A congressional commission recently reported that the CPI is overstated by 1.1%. The adjustment of the CPI by one percent would increase government revenues by approximately $133 billion.

(6) Medicare should be means tested (e.g. for retirees with over $60,000/year of retirement income for an individual).

(7) The rate of growth in Medicare spending should be controlled with incentives to fight against fraud and abuse. Also, the Medicare program should focus on preventative care (wellness programs, etc. {cost effective programs proven to save money and promote health}). The Medicare plan that the 104th Congress tried to pass was a start (unfortunately that plan was vetoed). Medicare spending is growing roughly three times the rate of inflation per recipient. The plan in congress would have tried to reduce the growth rate to roughly twice the rate of inflation (175 billion in savings over seven years). This was an attempt to reduce the rate of growth (not a cut). Spending per retiree would have risen roughly from $4800 to $7100 by the year 2002. This would have addressed the problems of Medicare in the short term (through about 2010 for Medicare, Part A). The longer term plan should include items like raising the eligibility age to deal with the simple fact that people are living longer.

(8) Allow for MSAs (Medical Savings Accounts) to help pay for medical costs (premiums, etc.) and to promote individual ownership of health plans.

(9) Support the Power of administrating Welfare and Medicaid programs returning to the states (where states can effectively use programs that encourage people to work and break the cycle of dependency).

Note: Are these the best and fairest solutions? I can only tell you that I believe they are much better for the future than the status quo of raising taxes and running higher deficits.

Published February 24, 1997
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