The Deficit Commission’s Deficit of Understanding

There are only three problems with the work of the Deficit Commission to date, as it has been revealed to us in the co-chairs’ briefing slides:

  • It will not survive the onslaught of special interests because it contains something to offend almost everyone, from homeowners, lenders, builders, and realtors (kill the mortgage interest deduction, indeed) to affluent retirees (bend the SS benefits curve downward, indeed).
  • It proposes higher taxes.
  • It aims at too many spending targets, and misses the elephant in the room: “entitelment” commitments, namely, Social Security, Medicare, and Medicaid (and their promised expansion via Obamacare).

The looming debt crisis and the cycle of dependency on government can be solved and broken, respectively, through the straightforward act of announcing that Social Security, Medicare, and Medicaid benefits will shrink steadily toward zero. The degree and rate of shrinkage would vary according to the age of the prospective recipient; for example:

  • Everyone now over the age of 55 would receive their current or currently promised benefits, as adjusted for inflation but not for wage growth (see next item).
  • The costly wage-parity feature of Social Security would be abolished. (Why should we subsidize retirees to keep up with the Joneses?)
  • Future benefits for persons aged 25 to 55 would be reduced on a sliding scale: from 95 percent for 55-year-olds to 5 percent for 25-year olds.
  • There would be no future benefits for persons under the age of 25.

The costs would be defrayed by a unified payroll tax, which would rise (initially) to cover persons who are older than 55 when the plan is adopted. The tax would decline — by law — as persons who are 55 and younger when the plan is adopted become eligible for benefits (or not, as the case may be).

How would individuals fund retirement and pay for health care when they have retired? A plan like the one I’ve outlined would be a great inducement to save more — and individuals could save more without sacrificing consumption as the payroll tax declines. Unlike the Social Security Ponzi scheme — where one’s “contributions’ merely pay off those who got in earlier — the higher rate of saving would generate economic growth and, thus, real returns on saving (as opposed to the phony returns on SS “contributions”). As for health care, insurance companies could get back into the business of competing to insure older Americans. And I have no doubt that joint ventures by insurance companies and health-care providers would lead to innovative and less costly ways of delivering medical care.

Following the tradition of William of Ockham, I shun the turgid, Rube-Goldbergish proposal of the Deficit Commission in favor of a frontal attack on the main cause of the deficit problem: “entitlement” commitments.

Related posts:
Economics – Growth & Decline
The Economic and Social Consequences of Government