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Why Entitlement Reform Needs To Be The Second Half Of Tax Reform


Even before President Trump signed his signature tax cuts into law, liberals were attacking Republicans for planning to cut entitlement programs to “pay for” the tax cuts. Put aside the hypocrisy of liberals and the mainstream media for their concern with debt only when taxes are being cut, and their decision to basically ignore the fact that President Obama almost doubled the national debt (including adding $1 trillion just for the stimulus bill in his first year). Letting taxpayers keep their own money apparently has to be “paid for,” while wasteful spending, e.g., Solyndra, does not.

The media does not seem to understand or care that conservatives view tax cuts as different from expanding government spending. Tax cuts help to grow the economy and allow taxpayers to keep more of their own money. Much of the recently enacted tax cuts are directed towards reducing America’s corporate tax rate, highest among developed countries, which makes it harder for American companies to compete and create jobs at home.

Each dollar of tax cuts thus creates more than one dollar of private sector benefit, and produces some government revenues. Liberals miss the point by insisting that each dollar of tax cuts create one dollar of government revenue. Conservatives want to grow the real world economy, not the government economy. We view tax cuts as helping the economy and wages return to historical norms and grow faster than recent anemic rates; this will in turn reduce the need for government services and spending.

Conservatives believe entitlement programs have needed to be reformed long before the current tax cuts, and that they are not sustainable in their current form. Conservatives believe these programs must be reformed so that we can keep our promises to seniors who have paid into both programs their entire lives, and to prevent these programs from overwhelming the rest of the budget, e.g., defense or infrastructure spending, and to avoid massive tax increases.

Demographic trends, such as people living longer and baby boomers aging, mean more retirees receiving benefits per worker paying payroll taxes, and mean Social Security won’t be able to meet its promises in 2034. Conservatives have thus long advocated for many reforms; the most ambitious of which involves increasing the returns of current Social Security funds by allowing individuals the option to invest a portion of their funds into the equity market rather than only Treasury securities. This is similar to how most private sector 401(k) plans work today.

Medicare faces the same demographic challenges as Social Security, as well as the fact that medical costs have been growing faster than the rest of the economy. So, the cost per beneficiary has been increasing at the same time as the number of beneficiaries has been growing. It is projected Medicare won’t be able to meet its obligations by 2029.

Workers earning an average wage are now projected to receive more in Medicare benefits than they have paid into the program. Conservatives have thus advocated for many reforms; the most ambitious of which involves premium support. The government would pay the majority of each beneficiary’s premium costs; seniors would have more choices than they do today; plans would have to provide benefits at least as generous as provided today (actuarial equivalency); and seniors could choose to lower their premiums compared to today by choosing more efficient plans, choosing to stay in a government run fee-for-service program, or choosing to pay more for a plan with more benefits.

Independent experts estimate the competition would reduce long-term growth rates in program spending as well as average beneficiary spending, meaning both the government and seniors would save money. This is similar to how the federal government and many large employers provide health insurance today.

The reforms being proposed by conservatives would reduce spending over the long-term, as opposed to the ten year window normally used in Washington. (Indeed, these reforms would actually reduce the projected growth rate in spending, not actually reduce spending below current levels. These “cuts” will still leave both programs spending many billions more than they do today.)  Most previous changes to entitlement programs have involved front-loaded savings, such as means-testing premiums, that do not change the long-term growth trajectory of the programs. It is more important to change the slope of the spending; former Sen. Phil Gramm (R-Tx) used to call this the magic of compound interest.

The earlier reforms to Social Security and Medicare are enacted, the more gradually they can be phased in and today’s seniors and near-seniors can be grandfathered in. It would be unfair to change the rules on individuals already in these programs or about to enter these programs. Premium support was first proposed on a bipartisan basis almost twenty years ago; imagine how much better off we would be if our leaders had acted then.

Churchill said you can count on Americans to do the right thing, after they have exhausted all the alternatives. We have exhausted the alternatives. Doing nothing is not an option. Ignoring the problem will result in massive tax increases, which would devastate our economy, or prevent us from keeping our promises to tomorrow’s seniors; neither option is acceptable. No parent wants to steal from their children, yet, kicking the can down the road means we will be borrowing from our children to spend today. They are the ones who will have to repay the trillions of dollars we are borrowing from China and others.

A combination of smart tax cuts and entitlement program reforms will result in more economic growth that benefits all Americans, and stronger Social Security and Medicare programs for today’s seniors and their children.