January 29, 2009
By Stuart M. Butler, Ph.D.
In America, we don't tend to use the words "solidarity" and
"social contract" as frequently or naturally as the Europeans do,
but the idea of a social contract is actually as American as apple
pie--or Social Security. In fact, the concepts of mutual obligation
and mutual support that are the foundations of a social contract
are also the foundations of both our republican form of government
and the institutions of our civil society.
Our American version of the social contract has two parts.
First, there is the contract between people at any point in
time. As in the European tradition this means the fortunate and
strong are seen as having an obligation to help the
unfortunate and weak when calamity strikes. In America, however,
that obligation is also accompanied by a corresponding
responsibility. Those who receive help are expected to use their
assistance to regain their independence> to the extent they can.
That notion of mutual responsibility was at the heart of the debate
over welfare reform during the early 1990s, and it contrasted with
the earlier doctrine of welfare rights--a one-way vision of
In America, the obligation of the community at any point in time
is seen generally as backup to personal responsibility and not the
first resort. We are all expected to turn first to personal savings
and insurance when in difficulty, and only then to turn to the
But there is a second part of the contract, and that refers to
the contract between the generations over time. It is a critical
foundation of the idea of social insurance. Social Security and
Medicare are manifestations of our agreement, as Americans,
that as each generation ages its members can count on a degree of
security underwritten in part by their own contributions and in
part by future generations. In return, the older generations also
have an obligation to help provide a secure foundation for their
children and grandchildren.
Mutual obligation pervades the American social contract. Mutual
responsibility is its central moral and social value, and continued
respect for that value is essential if the huge financial
commitments between the generations are to be managed in a
prudent and secure manner.
As we look well into the future, we must surely be worried that
the intergenerational social contract of today is structurally
unsound and morally challenged. The social insurance programs
we have constructed now threaten to weaken the economic security of
our children and grandchildren rather than strengthen it. And
increasingly they conflict with basic notions of social justice. We
need structural reforms of those programs to revive our vision
of the social contract.
How We Got There
There are several reasons for our predicament.
For one thing, we have gradually weakened the link between the
payroll contributions to our social insurance programs and the
benefits they promise. By their very design, there was always going
to be a tension between dedicated funding and promised benefits as
social insurance programs matured.
We have struggled with some success to maintain the link
between contributions and benefits in Social Security, but we have
steadily abandoned the relationship between contributions and
projected benefits in the case of Medicare. Promised Medicare
benefits today have little to do with projected payroll
contributions or dedicated taxes and will require ever-larger
general revenue support.
Exacerbating this funding problem, our version of social
insurance has morphed from a two-way obligation into a one-way
legal entitlement to assure a comfortable, long retirement for
middle-class Americans--whatever the cost in terms of funding for
other social programs or the burden on future generations. Medicare
and, to a lesser degree, Social Security now pose a staggering
financial threat to the economic security of our children and
grandchildren. This is a violation of the social contact and a
travesty of the idea of mutual obligation.
Those of us who are baby boomers have a lot to apologize
The second problem with the social contract in practice is the
way we plan the financing of our social insurance and related
programs. The federal budget process has encouraged self-delusion
about our long-term fiscal state and has added to fiscal
The five- or at most 10-year budget window we use in Congress
hides the true fiscal picture of these programs. It encourages new
long-term obligations because the long-term books don't have to
balance. The Medicare drug legislation is just the most recent
example of the budget process enabling a huge unfunded commitment.
Meanwhile, the budget process actually discourages politicians from
taking prudent steps to bolster the long-term financing of
programs, because the process emphasizes the short-term pain but
pays no attention to the long-term gain.
Moreover, the very "entitlement" or "mandatory" budget
designation given to these social insurance programs is a threat to
social justice. They effectively have first claim on available
funds, while other priorities--even central elements of the social
contract itself--must fight over what's left. Surely, there is
something wrong with a society which guarantees heavily subsidized
drug coverage to millionaires yet cannot or will not assure quality
basic education to our children or basic health coverage to working
As we look to the future, we must restore the values of the
American social contract by amending today's version, making it
fairer and actually more progressive and placing it on a sound
long-term financial footing.
Achieving Social Justice with
How can we do that, and what would the fiscally responsible
social insurance system of the future look like? A necessary
condition for achieving justice with financial prudence is to
alter the way the budget process deals with programs like Medicare
and Social Security.
The most elementary but critical step would be to show the
present value of future obligations front and center in the annual
budget and to require an explicit vote on any change. That would
mean that Members of Congress would have to lay out and discuss the
intergenerational commitments involved in these programs and face a
recorded vote on how they chose to allocate those commitments
between Americans. At the very least, requiring such a disclosure
and vote would trigger a conversation in the country about the
long-term financial picture and whether any modifications of those
commitments should be made.
A more substantive step would be to require Congress to
establish a long-term and enforceable budget--perhaps for 30
years--for entitlements such as Medicare and Social Security. That
30-year budget should be reviewed every five years and adjusted
according to economic conditions, competing needs, and new
projections about the burden on future generations. That budget
would be debated alongside other priorities and components of
the social contract, such as education, housing, and
discretionary health programs. And if the projected outlays or
revenues for the entitlement programs began to depart from the
budget, some form of budget trigger would be used to bring
them back to the agreed levels.
Let me be very clear about an important point here: A long-term
budget for these programs would not end the obligation to protect
recipients. In that sense, the programs would remain entitlements.
They would be entitlements in the way that public elementary and
secondary education is an entitlement, or virtually free
health care in Britain is an entitlement, but like these latter
programs, they would henceforth have real, long-term budgets that
would have to be debated and balanced against other priorities
and competing goals.
In this vision of the future, therefore, social insurance
programs would no longer be entitlements without limits. Nor
would they have an automatic preemption of resources over the
needs of other features of our social contract, such as
education and housing. And no longer would the financial
interests of today's active and retired generations automatically
take precedence over the financial interests of our
To be sure, those of us who argue for these process changes
recognize that they are not simple or easy to achieve and sustain.
But for the sake of future generations, we must begin to discuss
A National Conversation
I'm convinced that pushing for this process change would itself
trigger a serious conversation about how to reshape social
insurance programs in order to make them conform better to the
ideals of the American social contract and the social value of
mutual obligation. In my view, that conversation must have at least
First, we must refocus programs more on the idea of true
insurance and move away from the current emphasis on promising a
flow of benefits as a payback for contributions made. When
Social Security was created, it was intended in large part to be
insurance against poverty in old age and, in a sense, against
the financial burden of living too long. Social Security, and later
Medicare, were not envisioned as vehicles to finance large parts of
everybody's retirement on their children's and grandchildren's
True insurance means giving stronger protections for those
with the least means while tapering down the benefits for the less
needy. It means making these programs more of an insurance
against calamity and poverty. We have already income-adjusted
Social Security to a significant degree through the design of the
payroll tax and the partial taxation of benefits. We also adjust
Medicare Part A at the front end through the payroll tax. So we
have taken some steps in that direction.
But if we are to limit the huge burden on future generations, we
need to build on these steps in a systemic way. For instance, we
should further decrease after-tax Social Security payments and
increase Medicare Part A out-of-pocket costs for middle- and
upper-income Americans while increasing benefits for less affluent
Americans. And we should further adjust premiums for Medicare B and
D by income--after all, they are subsidized insurance, not even
true social insurance programs.
Second, in keeping with a real budget for social
insurance, and particularly Medicare, we need to put into place
mechanisms that will enable us to constrain directly the volume of
public spending in these programs. Call it explicit rationing if
you will. Or call it a reasonable process to avoid passing on a
huge credit-card debt to our children.
Now, some of you may contend that the way to reduce the
long-term financial burden of Medicare and other health programs is
by improving the unit efficiency of health services through
outcomes measures, or through health IT, or by even more
aggressive marketplace competition. I agree with all those
steps to improve value for money, but an overall public budget for
publicly financed health programs is necessary for two
I already mentioned the need for a real budget as part of budget
process changes and the need for a mechanism to enforce that
budget. While in principle that might be done with automatic
adjustments to such things as payment rates, I think we have
learned the hard way that that is not likely to be politically
successful. We would be more likely to succeed if a statutory
bipartisan commission were created to recommend a package of
The commission would periodically review benefit levels and
covered services and submit its package of changes to Congress for
an up-or-down vote to maintain course on the budget. A variant in
Medicare would have the commission structuring global budgets
for hospitals or other parts of the health system, such as in
Britain or Canada. A commission could also fine-tune a premium
support system, which would operate as an adjusted voucher.
Senator Dianne Feinstein (D-CA) and Senator John Cornyn (R-TX)
have just reintroduced legislation for a permanent solvency
commission for Social Security and Medicare. I think that could be
Third, there has to be a significant change in the
eligible retirement age for social insurance programs. We
cannot sustain a system in which today's young Americans can expect
to spend as much as one-third of their adult life in retirement,
financed by succeeding generations who have to support their
parents and grandparents while trying to plan for their own
That means raising the normal retirement age as quickly as
possible to 70 or beyond and linking it in the future directly to
life expectancy. It also means adjusting--actually,
liberalizing--our definition of disability as well as improving
work flexibility for older workers.
Early retirement on Social Security, in other words, cannot in
the future be just a preference. It must instead be related to
deterioration in a person's ability to continue in employment. And
we need to make it easier for older workers to switch to less
physically demanding jobs through such things as general reforms in
our health care system so that coverage ceases to be job-based.
Fourth, we will need to accompany changes in our social
insurance system with improvements in our system of personal
savings and insurance. As the social insurance system of the future
becomes more focused on those who truly need society's help, we
must encourage those who are able to do so to build up resources
and protections for hard times and for retirement so that they are
less reliant on others.
My own preference is to do that partly within an overall
redesign of Social Security and Medicare by permitting some payroll
taxes to be devoted to private retirement savings and
But even if you do not agree with that approach, we must still
foster personal financial protection alongside social insurance.
Simple steps like automatic enrollment in savings plans would
help to realize that goal. So would incentives to encourage
long-term care insurance. And delinking health care coverage from
the workplace would foster long-term and personally owned insurance
contracts that could be carried into retirement.
A Vision for the Future
The vision of the future that undergirds this redesign of our
social insurance programs maintains the values of our society that
are enshrined in the American idea of the social contract.
Such a redesign would provide better protection to those who
need it while reducing the crushing financial burden the current
design will impose on future generations. It would also conform
more closely to President Franklin Roosevelt's original vision of
social insurance as one leg of a three-legged stool of financial
security, with personal saving and pension programs providing
I believe this vision of a future social insurance arrangement
would also maintain the coalition needed to assure that any social
contract and network of programs will be preserved. I believe
that because it returns more emphatically to the bedrock values of
our society, including our sense of social solidarity and mutual
obligation both across society and between generations.
Stuart M. Butler, Ph.D.,
is Vice President for Domestic and Economic Policy Studies at The
Heritage Foundation. These remarks were prepared for delivery at a
Conference on Social Insurance, Fiscal Responsibility, and
Economic Growth sponsored by the National Academy of Social
Insurance and held in Washington, D.C
Simple steps like automatic enrollment in savings plans, incentivesto encourage long-term care insurance, and delinking coverage fromthe workplace would foster long-term, personally owned insurancecontracts that could be carried into retirement, maintain thecoalition needed to assure that these programs will be preserved,and be consistent with our sense of social solidarity and mutualobligation across society and between generations.
Stuart M. Butler, Ph.D.
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