Politics & Policy

Ryan’s Hope

Entitlement reform without tax increases.

They said it couldn’t be done. But Congressman Paul Ryan (R., Wis.) has just done it.

Ryan is the ranking Republican on the House Budget Committee, and a member of the House Ways and Means Committee. This morning, Ryan will introduce legislation providing for a package of comprehensive reforms to Social Security, Medicare, and Medicaid that will completely eliminate the long-term entitlement crisis, without tax increases.

Since the early 1950s, federal spending has been relatively stable at around 20 percent of GDP. But official projections now show that over the next 35 years, this will soar to close to 40 percent, primarily due to the big three entitlement programs. Anything even close to this would be a defeat for limited-government conservatives.

But Ryan’s reforms to these programs would balance the federal budget, with federal spending and taxes both at 18.5 percent of GDP, the long-term average for federal taxes. The reforms would also achieve full solvency for Social Security, eliminating all long-term deficits. The reforms have been fully scored as achieving these results by the Congressional Budget Office and the chief actuary of Social Security.

The reforms include personal accounts for Social Security, following the model of the Ryan-Sununu bill introduced in the last Congress. These accounts are the key to the success of the reform package. For they just don’t trim the growth of federal spending; over time, they shift much of that spending from the public sector to the private sector.

Workers would be free to shift 5 percentage points of the payroll tax to the accounts. (The employee share of the Social Security payroll tax is 6.2 percent, and last year’s Sununu bill allowed employees to shift this whole amount into personal accounts.) For workers who exercise this full option over their entire careers, the accounts would substitute for about 80 percent of Social Security retirement benefits, with the account benefits substantially higher than the Social Security benefits they replace.

Eventually, these accounts can and should be expanded to the original Sununu level, at which they can finance all Social Security retirement benefits. Then the accounts can and should be expanded more, providing for all of the benefits now financed by the payroll tax.

Like the Sununu bill, the legislation provides a federal guarantee that workers with personal accounts will get at least as much from the accounts and continuing Social Security benefits as promised by Social Security under current law.

Moreover, Ryan finances the entire transition to these accounts by reducing government spending, primarily through the other entitlement reforms.

For Medicaid, the reform gives each state a choice. The state can choose a block grant of federal spending on the program, with the state then determining how that money is spent. Or, the state can choose to have the funds devoted to income-related vouchers to buy private health insurance for those who qualify. Part of the federal funds would still be used for a block grant for nursing home care. In either case, the program’s growth is limited so that total federal spending remains within the above parameters

For Medicare, the program’s payroll-tax revenues are used to fund vouchers for seniors to buy private health insurance. The general revenues now used to finance Medicare are used to provide income-related supplements to these vouchers to ensure that low- and moderate-income retirees can buy such insurance. Again, the growth of this spending is limited.

Another important reform is a cap on the growth of total federal spending each year. Such enormous reductions in long-term spending and taxes would produce enormous long-term economic growth, which would mean huge revenue increases for the government. Those revenues could be used to sweeten the long-term entitlement benefits to make the reforms more politically appealing. (Unfortunately, the troglydite number-crunchers at the CBO cannot handle dynamic scoring, meaning they do not consider these extra revenues in their estimates — and thus underestimate how much good this would do America. Reforms of this magnitude must be scored on a dynamic basis for a complete understanding of the long-term results.)

Instead of supporting reform commissions composed of Washington insiders with no ideas, conservative reformers should be working directly for such fundamental reforms

These sweeping, historic reforms are frankly bigger than the entire New Deal. Social Security was the crown jewel of the New Deal, but Medicare and Medicaid were not adopted until the 1960s. These three programs account for $1.3 trillion in Federal spending in the current fiscal year.

Moreover, Ryan’s legislation also provides for general health-care-reform policy. The refundable tax credits discussed in regard to Medicaid reform would be available to all workers in fact, with the value of employer provided insurance included in workers’ incomes for tax purposes. This would allow all workers to choose their own individual, portable insurance, rather than relying on insurance chosen and provided by their employers.

Indeed, the total Ryan package introduced this morning includes sweeping tax reform as well. It would allow workers to choose an optional modified flat tax with a rate of 10% for single filers earning less than $50,000 per year and for joint married filers earning less than $100,000 per year, and a rate of 25 percent for amounts earned above those limits.The current corporate income tax is replaced with a business consumption tax of 8.5 percent. The Alternative Minimum Tax (AMT) is also abolished.

Just call him Paul Roosevelt Ryan. This is real change, Mr. Obama. What have you got?

— Peter Ferrara is director of entitlement and budget policy for the Institute for Policy Innovation, and general counsel of the American Civil Rights Union.

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