Rethinking Social Insurance

On Tuesday, February 19th, the Fiscal Policy Program at the New America Foundation held a joint event with the Heritage Foundation entitled "Rethinking Social Insurance.” At this event, Maya MacGuineas (New America Foundation) and Stuart Butler (Heritage Foundation) released a paper by the same name, which then received comments from former CBO directors Alice Rivlin (Brookings Institution) and Rudolph Penner (Urban Institute).

The event was moderated by Jodie Allen, Senior Editor of the Pew Research Center, who began by noting that the country has been trying to rethink social insurance for a long time, and has been unsuccessful in putting the United States on sound fiscal footing. Allen briefly discussed the conditions which made the 1983 reform to Social Security possible, suggesting that they don’t yet exist today.

Maya MacGuineas, Director of the Fiscal Policy program at the New America Foundation, spoke next. She explained that their paper was motivated by the reality that the United States is on an unsustainable fiscal path, driven primarily by the growth in social insurance. “The political system is not eager to address these challenges,” she explained, “because there is no way to sugarcoat it.” Before discussing the proposal she put forward with Butler, MacGuineas aimed to dispel several myths.

First, even if the Bush tax cuts were repealed and some taxes were raised further (both of which she supports), this would not be enough to solve the fiscal problem. Second, although healthcare poses the largest fiscal threat to the budget, healthcare reforms alone are unlikely to close the fiscal gap. Since Social Security is the biggest program in the budget and it faces serious imbalances, it must be reformed. And finally, Medicare reform must go beyond fundamental healthcare reform, requiring a renegotiation of the promises we’ve made.

MacGuineas went on to explain that unfettered growth in entitlements, even if not paid for through new debt, threaten to both balloon the size of government and to squeeze out other important priorities, especially investment in the next generation. She then outlined the basics of their plan to overhaul the social insurance system, which include three parts:

1. Mandate savings for routine healthcare costs and basic retirement costs, with the government involved in regulating and subsidizing the savings.
2. Shifting away from “social” and toward “insurance” by mandating insurance for things like healthcare, long-term care, and unemployment, with the government helping to develop risk pools, subsidize purchasers, regulate coverage, as well as provide cross-subsidization and reinsurance.
3. Reduce costs of current entitlement programs by scaling back benefits for people who rely on the programs the least, leaving a strong safety net intact.

MacGuineas closed by explaining the paper was written to offer big, bold ideas, rather than the incremental reforms which generally fail and sometimes make the problem worse. MacGuineas believed that her proposal would enhance budget flexibility, make room for other priorities, protect people who need protection most, and increase economic growth.

Stuart Butler, Vice President of Domestic and Economic Policy at the Heritage Foundation spoke next. He began by remarking that it would be impossible to “tweak your way out of this problem,” and that we have to think carefully of our obligations to each other and square it with our resources and our commitments to the young and elderly. Ultimately, he suggested, we must provide reasonable and affordable protections to everyone in a way that recognizes the fiscal restraints we’re under. This would require, in his view, fundamentally changing the way we spend money.

According to Butler, there are two basic budget process problems. First, long-term obligations are hidden from the budget process, and are not factored into decisions. Second, certain programs have a special “mandatory” status which allows them to grow automatically and preempt everything else, regardless of need, fairness, or our national values. To combat these problems, the paper suggested two major changes.

First, they would require a prominent measure of the long-term costs in an annual budget on which Congress will have to vote. Additionally, they would turn all entitlements into “long-term budgeted” discretionary programs with a 30-year budget that must be revisited every five years from adjustment. These changes would balance promises and protections currently offered against other protections and fiscal realities, and would also change the current default so that entitlement programs would have to be voted on just like everything else.

Butler then attempted to answer some questions which be believed would arise. First, he addressed the criticism that changing social insurance will be “breaking a promise”. He responded that the promise we made is unsustainable, and we have an obligation to fulfill promises we’ve made to future generations as well. Next, he turned to the criticism that offering benefits to the upper-middle and upper-class is necessary to maintain support for a program meant for the poor. Instead, he argued that these beneficiaries are actually using their extra resources to expand middle class entitlements to the detriment of the poor. This dynamic, he suggests, is perverse --- and people are starting to notice. Finally, he turned to the question of mandates, which conservatives might be averse to. He agreed that conservatives are wary of mandates to make people do new things, which means the government is taking more control over the public. Using mandates to replace what the government is already doing through taxes and transfers (or spending), though, actually expands individual choice. Butler concluded with his belief that people would be willing to accept reform, as long as it was done in an open an honest way.

Alice Rivlin, a Senior Fellow at the Brookings Institution was the first to offer comments, expressing her delight that the paper was written and her hope that it will spark a serious debate. She did caveat that she did not support many of their prescriptions, including their proposal to overhaul Social Security. Still, she shared the concern that entitlements are on an unsustainable path and the belief that big changes will need to be made. She also expressed her agreement that real reform would require both drastic healthcare and entitlement reform.

Rivlin remarked that the paper provides an “elegant solution...but not a simple solution.” It would involve a lot of regulation on the savings accounts, risk pooling, etc. It also involves a lot of means-testing which could create adverse incentives when added up. She suggested that it might be a good framework for some programs, but not for all programs.

Rudy Penner, Senior fellow at the Urban Institute, spoke next. He praised the importance of the paper in offering more options for budget reform. He expressed his belief that their proposal raises the fundamental question over what we mean by “social insurance”. He agreed with Butler and MacGuineas that it was unnecessary to give benefits to the rich in order to ensure benefits go to the poor. In fact, he suggested, the growth in these entitlement programs actually squeezes out other programs for the poor, and would continue to.

Penner suggested that the proposal was primarily aimed at maintaining the protection of society against “those who would irresponsibly throw themselves into society’s safety net and live at the expense of tax-payers.” This is done through the introduction of savings and insurance mandates aimed to offset the perverse incentives from means-tested programs. Although these mandates are regressive, the proposal tries to compensate for this through progressive subsidies. Penner called into question whether these mandates would truly be necessary, suggesting that more quantitative analysis is necessary to determine how much moral hazard would be caused by means-testing the programs.

Enacting the proposal, Penner contended, would require working out tens of thousands of details. Still, he praised it for offering a lot to think about in a time when our fiscal situation must be addressed seriously.

Paul Hewitt of Americans for Generational Equity offered the first comment during the question and answer period, expressing his concern that “people with college degrees” would be forced to bear all the cost of social insurance reform. He suggested that all income groups and all ages would have to be involved in paying for the entitlement shortfall, since policies such as eliminating the cap on taxable earnings would be woefully inadequate.

Butler responded, stating that Hewitt’s point on removing the cap wouldn’t solve much of the problem proves that major reform is required. MacGuineas also weighed in, arguing that addressing our long-term obligations is fundamentally about trade-offs. She expressed her opinion that the wealthy should be responsible for bearing most of the burden, but that the elderly should not be immune, and would be subject to both means-testing and an increased retirement age.

Tom Miller of the American Enterprise Institute then asked whether replacing tax and transfer policies with mandates results in any real change in the total burden on the economy, or only means of financing and distribution. Butler argued that mandates were, in fact, superior to taxes because they offer individuals more choices, although not total choice. MacGuineas agreed that mandates were more efficient, since people were less likely to view them as a tax. She also underlined that while she and Butler agreed reform should make the system more individualized, transparent, and progressive, they disagreed on how big the government should ultimately be. This, she suggests, will be the biggest dividing line between the left and the right, going forward.

Allen followed up by asking how mandates would be enforced. MacGuineas suggested using employers for automatic withholding and default mechanism, making sure everyone is “banked”, and improving reporting standards could all play a roll.

The next question, from the Office of Senator Dick Durban, suggested that MacGuineas’ and Butler’s proposal is a value-shift from keeping promises to holding onto a fixed amount of spending of GDP. Butler refuted this, explaining that the real value shift is away from offering benefits to everyone, even if they don’t need them, and toward offering protection to everyone who needs it, rather than burdening younger generations.

Joe Anderson of Capital Research Associates asked for some elaboration on how the retirement age would be changed. MacGuineas suggested the retirement age would have to be increased, for both Social Security and Medicare, in order to ease the transition into a new system. This would have to be accompanied, though, with measure to make work more flexible and health insurance more available to the elderly.

The final question came from John Rother of AARP, who suggested that getting our social insurance obligations under control would require fundamental healthcare reform. Although MacGuineas agreed that slowing economy-wide healthcare costs will be the fundamental key, she did not think that lack of progress on healthcare reform should be an excuse to ignore the cost of entitlements on the government. Regardless of the drivers of cost, she argued, it would be unfair to continue giving a part of the budget “most favored status.” Butler closed by warning that raising tax rates to pay for all these costs could result in marginal tax rates upwards of 70%, and that real controls in the public expenditure on healthcare were absolutely necessary.

-Mark Goldwein, Research Assistant for the Fiscal Policy Program.



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Participants

• Maya MacGuineas
  Director, Fiscal Policy Program
  New America Foundation

• Stuart Butler
  Vice President, Domestic Policy
  The Heritage Foundation

• Rudolph Penner
  Senior Fellow, The Urban Institute
  Former Director, Congressional Budget Office

• Alice Rivlin
  Senior Fellow, The Brookings Institution
  Former Director, Congressional Budget Office


• Jodie T. Allen (moderator)
  Senior Editor
  The Pew Research Center