international analysis and commentary

The clash over welfare policies and the presidential race


Both parties, on the path to the presidential election, used the national conventions to cast the race as a choice between two vastly different futures. But the real choice we face is between the future and the present. Both parties ask future generations to foot the bill for our over-spending: Democrats want to have it all and Republicans want to end it all (but not until the current generation is finished consuming everything). But there’s a third option: to leave our children with less debt and more assets by curbing our own consumption now to invest more in the future.

Some insist (conveniently) that the older you are, the less that can be expected of you. But income and wealth are closely related to age: While earnings and financial security decline with age after retirement, they rise with age prior to it. An 80 year-old retiree would likely find it financially daunting to suddenly cope with a drastic and unexpected cut in entitlements. But the Baby Boom generation, not today’s 20-somethings, tend to be among the wealthiest Americans, for whom changes in Social Security or Medicare benefits would mean the least. Of course, not every 55- or 65-year-old could easily absorb an additional financial burden at this point in their lives – but many can, more so than the younger Americans whom both Democrats and Republicans currently expect to bear the brunt of our decisions today.

With that in mind, here are a few modest suggestions:

  • First, render Social Security solvent for the duration of the Baby Boom’s retirement by making the Boomers forward-fund their own retirement payments – which, of course, is how most Americans believe (erroneously) Social Security is supposed to work anyway. To do this, we simply need to lift the cap on incomes subject to the payroll tax (which funds Social Security); this cap is currently set at roughly $130,000 – any income over that pays 0% toward Social Security. Obviously, this is a system that places a heavier burden for funding the retirement system on lower-income than higher-income workers. Eliminating the cap to subject all earned income to the payroll tax would fully fund Social Security for the next 75 years; alternatively, since the cap level has not been raised at the same rate that wages overall have risen (giving even more of a break to higher-income workers), simply raising the cap to the same level it was 30 years ago, adjusted for inflation, would cure half the Social Security shortfall. 

In addition, if you want to migrate to a system of private retirement savings in place of at least a portion of Social Security – which I agree with conservatives is a good idea (if you also give people their preferred option of, yes, keeping their money with the government) – the main impediment, which conservatives are loath to acknowledge, is the need for a considerable cash infusion from the current generation to forward-fund it. Eliminating the cap on taxable earned income would help do that as well. Alas for Republicans, that would mean taxes. On really high earners. Of course, as they like to say, governing means choosing.

  • Second, means-test Medicare. This means that, again, wealthy seniors today would help reduce the program’s costs, but through benefit reductions rather than a tax hike. Converting Medicare to a voucher, as Paul Ryan famously advocates, would make it easy to means-test – but you can almost hear the conservatives interrupting: “Wait, that’s not what we had in mind.” So, alternatively, we could make Medicare more like a real insurance program by picking up seniors’ healthcare expenses, beyond some basic level of preventive care, only when they reach totals that put a strain on their budgets – a universal entitlement that, by definition, varies with income.  This reflects a conservative critique of the current third-party health insurance system and its resulting cost inflation, and may be the direction that market is headed anyway, so it would be a reasonable starting point for bipartisan compromise.
  • Third, address long-term care. Medicaid has always been Republicans’ favorite whipping boy, since it was designed as the healthcare program for the poor. In recent decades, however, it has become something else: the nation’s de facto long-term care (LTC) program. Today, two-thirds of Medicaid expenditures go not for poor kids but for middle-class families struggling to care for their parents. The result: a program that doesn’t meet either need particularly well. A more sensible LTC system would see families putting aside money today to cover aging expenses down the road – this could remain voluntary (to placate conservatives), with an opt-out structure (to please liberals) and means-tested premium support (to satisfy both/neither), easily integrating with the Medicare reforms above. 

Of course, no politician will propose any of this anytime soon. That’s unfortunate – and not just for future generations. These issues aren’t just a matter of intergenerational warfare – of Boomers choosing whether to take everything with them to their graves, or leave more behind for the young. Because most Boomers can expect to live long enough that the bill will come due while they’re still alive. There’s really only one way to guarantee the retirement that Boomers expect but haven’t saved for themselves, and that’s to invest more today in the things the next-generation workforce will need in order to compete in the global economy of the future and earn enough to pay that bill.

I would make this explicit, and in that regard, Paul Ryan got one thing right: a “hard cap” that ties the rate of entitlement growth to overall economic growth. This may sound like a Republican dream come true (although it’s worth noting that President Obama has proposed such a cap, as well, but his is “soft,” i.e. only aspirational rather than mandatory). But it’s worth considering what our politics might look like if we were explicit with older and middle-aged Americans that their retirements depend upon how productive the generation behind them becomes in an increasingly global and knowledge-based economy. Now, that might actually get most of today’s voters to start thinking about tomorrow.