How to Reform Entitlements and Save the American Dream – Without Raising Taxes

COMMENTARY Social Security

How to Reform Entitlements and Save the American Dream – Without Raising Taxes

Jun 21, 2011 3 min read

Research Fellow, Tax and Economic Policy

Curtis Dubay, recognized as a leading expert on taxation issues, is a former research fellow in tax and economic policy.

America must get its fiscal house in order. The Congressional Budget Office estimates that, absent action from Washington, our national debt will be nearly as big as our entire economic output in just 10 years. By 2035, debt will be up to nearly double what we produce. No economy can stay afloat with that much red ink.

So what would you say about a reform plan that balances the federal budget in 10 years, cuts the national debt by more than half in 25 years, saves Social Security and Medicare from bankruptcy, and preserves the American dream for generations to come – all without jacking up taxes? It’s no pipe dream. It can be done.

An analysis by federal budget experts at the independent Tax Policy Center (a joint venture of the Urban Institute and Brookings Institution) found that a new fiscal reform plan developed by my colleagues at The Heritage Foundation accomplishes all that, and more.

How do we do it? First and foremost by reforming the biggest drivers of government debt: entitlement programs like Social Security and Medicare.

A problem of demographics

For decades, politicians have made entitlement promises that taxpayers can’t afford to keep. These programs tax today’s workers to pay benefits to retirees. The problem is, the politicians keep promising better and better benefits, even as the number of retirees increases faster than the number of people paying for them.

The problem is simple demographics. Back in 1960, there were five workers for every retiree. Today there are three workers for every beneficiary. In less than 20 years, the ratio will be two-to-one. There are simply not enough workers to pay benefits at current levels for the onslaught of Baby Boomer retirees now starting to enter the system. And retirees are living much longer, even as health-care costs are spinning out of control.

Recognizing these problems, our plan transforms Social Security and Medicare into real insurance programs, rather than the open-ended entitlements they are today.

Social Security benefits only to those who need them

We provide financial security to retirees and guarantee assistance to people who need it. Our plan does not lock in benefits for those who have no need for them, nor does it raise taxes to make sure the Bill Gateses of the world can get subsidized health care. Instead, government payments for the well-off are reduced, but their taxes, and their kids’ and grandkids’ taxes, are not raised. We keep government smaller and taxes lower.

Social Security returns to its original purpose: to guarantee seniors don’t fall into poverty. We do this by providing a flat benefit for those who work for more than 35 years. The benefit is set high enough to assure that no senior need fear falling into poverty once they stop working. (Pegged well above the federal poverty index, our benefit would actually be higher than the current average benefit.)

But because our plan is an insurance program, affluent seniors (those among the top 10 percent in income) would get reduced benefits. Approximately 4 percent – the most affluent – would receive no benefits unless their circumstances changed drastically for the worse.

Changing Medicare to 'premium support'

We change Medicare from a stream of government payments to doctors and hospitals to a premium support system, much like what members of Congress and federal employees enjoy today. Instead of the federal government paying the medical bills of seniors, our plan empowers seniors to purchase health insurance that best fits their needs. Choice and competition will foster innovation and bring health care costs down.

We cannot fully fix our fiscal woes without addressing other unaffordable health policies. Thus, we repeal Obamacare and replace it with patient-centered reforms including a tax credit for families to purchase private health insurance plans. The lowest-income families would get larger credits.

Simplifying the tax code for economic growth

No fiscal plan would be complete without pro-growth tax reform. Some argue the economy can grow fast enough at current tax rates or even with higher levies. Not true. The current tax code already needlessly inhibits economic growth. Raising rates, or adding a new layer of taxes would only worsen the problem.

Our plan completely revamps the tax system, replacing income and payroll taxes with a single rate tax of about 28 percent on income minus whatever you save. If that sounds high, remember that payroll taxes add 15.3 percent to your income tax rate. If you pay the 25 percent income tax rate you’re paying more than 40 percent in total. And our plan eliminates the Alternative Minimum Tax and the so-called death tax, too.

At the end of the day our plan, while economic in nature, is designed to serve a moral purpose. If entitlements are not reformed, the rising generation and several thereafter will be saddled with punitive taxes to pay off the crushing debt we’ve been piling up for decades. Absent reform, the American dream itself – the promise of opportunity and the chance to prosper through hard work – will become a thing of the past.

Our plan ensures economic security for our seniors, while preserving for younger generations the American dream bequeathed to us by past generations.

Curtis Dubay is senior tax policy analyst in The Heritage Foundation’s Roe Institute for Economic Policy Studies.

First appeared in The Christian Science Monitor