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An Alternative Approach to Entitlement Problems

We need new thinking on entitlements – and how to pay for them...

I OFTEN say that most problems today, around the world, are conservative problems, writes Nathan Lewis of New World Economics.

Getting government spending into line, reforming tax systems, implementing a Stable Money framework, reforming entitlement programs so that they do more but cost less, cutting needless government headcount, reviewing regulatory frameworks that have become bloated from a constant addition of new measures, and so forth.

A hundred years ago – 1913 – the world arguably had a lot more liberal problems: how to deal with the difficulties the working class experienced even within a context of overall economic prosperity. This eventually translated into a series of government programs, such as state-funded primary and secondary schooling, the adoption of a five-day, forty-hour workweek, elimination of child labor, introduction of welfare and unemployment services, senior income support, workplace safety regulations, environmental regulations, and eventually some form of universal healthcare. 

These topics are still important, but for the most part, the problems of 1913 have been solved. Now, we have the problems those solutions created.

The solutions were appropriate for their time. When Social Security was implemented in 1935, the over-65 portion of the population was a lot smaller then than it is now. Most people died before 65. Thus, the program could be funded with a 1% payroll tax. It's hard to complain too much about that. Today, of course, the situation is different.

Universal healthcare programs, in other developed countries, began with costs around 3%-4% of GDP. Today, the US government (all levels) is spending north of 7%, and that doesn't even cover most people.

Conservatives generally have not had very good ideas of how to create new programs that are much better than what we have today. Historically, the planning of the programs has been left to liberals, while conservatives mostly grumped about the cost. Today, most conservative plans are of the slash-and-burn variety, to get costs down by cutting benefits, within the context of the existing program. Liberals, quite reasonably, do not want to see their accomplishments of the last century of effort slashed and burned by grumpy rich guys.

I suggest a better approach: start with a clean sheet of paper, and then figure out a way to solve the problem while spending less money. The end result should be more overall benefit and much lower cost.

If you look at the two main entitlement programs today – Social Security and Medicare – you see immediately that they are extremely inefficient and costly ways of solving the problem of senior income insurance and healthcare. Social Security, for example, pays the most money to the people who need it least – those who had the highest incomes during their lifetime, and have often accumulated substantial assets on top of private-sector pension benefits. Often, those who need it most – those who had the lowest incomes during their lifetime – get benefits so small that they don't really solve the basic problem of debilitating poverty.

Rather than jiggering the existing Social Security program with tweaks like "means testing," I suggest a clean-sheet-of-paper solution. It would be more like our existing welfare programs. If you qualify, you would get a flat-rate contribution that would be the same for everyone, no matter what their income was. This would likely be much less expensive than the existing Social Security program, which means that taxes to fund it could be much lower. It would be better to roll the program into the general budget and not have separate earmarked taxes, like any other welfare program. This would potentially allow the complete elimination of payroll taxes.

The combination of no payroll taxes and also senior income insurance potentially higher than existing Social Security payouts would do a lot more for those with lower incomes than maintaining today's existing Social Security program. Also, it would be a lot cheaper.

This could be combined with some form of mandatory private savings plan, which has been implemented in many countries worldwide with good results.

This is just one idea. I'm sure someone could make a better one. The important thing is that someone introduces some new ideas, rather than just cutting benefits within the existing framework, for example by raising retirement ages. No matter how many years people have left to live, a 65-year-old today still has a hard time as a full-time employee, just as they did in 1935. This does not solve the problem of senior income insurance, but makes it worse, as there is now a cohort of 65-66-year olds that might be in genuine distress. It does not even solve the problem of excessive cost very well, but is merely a minor patch on a flawed system.

The other big entitlement issue is healthcare, and here we again have a great opportunity to provide much more effective benefits while cutting costs substantially. The main problem with government healthcare in the United States today is that it is grotesquely expensive – while, at the same time, many needy people get nothing at all. Liberals want more coverage – a valid argument since every other developed country's government has found a way to provide universal coverage. Conservatives complain – also quite rightly – that the present system costs way too much.

The primary observation here is that the US government is already spending as much on healthcare, as a percentage of GDP, as the average for OECD countries. However, those other governments get universal coverage for their money, while the US gets only partial coverage. Basically, the US government is getting grotesquely overcharged by the healthcare industry, one way or another. This is very obvious, but for some reason nobody wants to acknowledge it.

But, we can go beyond that. Other countries' universal healthcare programs are also rather aged and bloated antiquities, also due for reform and replacement, and not necessarily a good template for imitation at all.

Let's clean-sheet our healthcare plan. First, do we want some form of universal healthcare? I say that we do. The notion of people with health issues being abandoned in our prosperous society does not sit well with the majority of the population.

How much should it cost? How about 4% of GDP. That is a lot less than the 7%+ paid by governments in the US today. Conservatives can hardly complain about a plan that cuts expenditure in half.

I'll take up the topic of what this might look like in the future. For now, just consider it an interesting engineering exercise, somewhat like cramming what amounts to a small notebook computer into the case of the iPhone 5. What would your solution be?

Some will complain that such things are "not politically feasible." But, politics changes constantly, and at some point, people might be clamoring for real solutions. Certainly, it might be more feasible than monstrosities like Obamacare.

After all, that was how these programs were originally implemented. They were revolutionary in their day, just as these new solutions will be revolutionary in ours.

This new framework, as we reform and replace our decrepit 20th-century solutions to 19th-century problems, is what I call "21st century capitalism."

This article originally appeared at Forbes.

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Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

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