Commentary

The Overwhelming Entitlement Crisis

By Peter J. Ferrara
This article originally appeared in the Washington Times.

The biggest problem facing America is the overwhelming entitlement crisis. The National Entitlement Commission, headed by Sens. Bob Kerry and John Danforth (now retired), reached the following, startling conclusion. If no changes are made, then just 15 years from now, only five federal programs will consume all federal revenues. The five are Social Security, Medicare, Medicaid, interest on the national debt and federal employee retirement. No money would be left for any other federal activity, whether national defense, welfare, federal law enforcement, aid to education, or any other. All of these programs would have to be financed by deficit spending.

And it just gets worse. Boston University Professor Laurence Kotlikoff, who pioneered the concept of generational accounting to project federal tax burdens, calculates that with no change in current law, a child born today would have to pay 84 percent of his or her lifetime income in taxes to finance an entitlement programs and other government spending.

So what are our representatives on Capitol Hill doing about it? Why, proposing to expand entitlements, of course.

The latest rage is the Kennedy-Hatch so-called “kid-care” bill. Remarkably, erstwhile “conservative” Sen. Orrin Hatch has teamed up with that liberal icon of I-could-care-less irresponsibility, Sen. Ted Kennedy, to propose a new entitlement program that would pay for children’s health insurance.

Under this Great Society-style program, the federal government will provide grants to each state to cover 80-90 percent of the cost of the program. The states would then effectively provide health insurance vouchers that each eligible family could use to buy insurance for their children from private insurers. Mr. Hatch apparently thinks this makes the proposal conservative. But a massive increase in new welfare spending as Mr. Hatch has proposed is not conservative, regardless of how it is structured.

After Republicans rightly sought to restrict the growth of Medicaid in last year’s budget, Mr. Hatch’s proposal would effectively be a massive increase in Medicaid to cover children in families above the poverty line and in the middle class. The increased spending from Mr. Hatch’s new welfare entitlement would dwarf the welfare spending reductions the Republicans achieved last year. In the face of the looming entitlement crisis, the childish irresponsibility of this proposal is breathtaking.

Mr. Hatch’s program is to be financed by a 43-cent increase in the federal cigarette tax, with an equivalent tax increase on the other tobacco products. But the notion that this would produce enough revenue to finance the program is fatuous. The cost of the program will soar well past the estimated $20 billion over five years, just as Medicare and Medicaid ended up costing several times their original estimates, With the feds paying the costs, the states will set much higher income eligibility levels than expected.

Moreover, the cost estimates are based on covering only the minority of children who are currently uninsured. But with a federal handout available, families win dump their current coverage in droves and buy new coverage with the federal subsidy. In addition, the insurance must cover everything Medicaid covers, which will make the policies expensive. This also requires the policies to cover abortion in the states that include abortion coverage in Medicaid.

What should Republicans do? Politics is at root an intellectual struggle over how issues are framed. If Republicans start to propose their own narrow kid-care proposals, they will simply legitimize the claim by Democrats and liberals that the government must do something on this issue. They will have avowed the other side to frame the issue as to how the government will provide coverage and care to uninsured children.

Republicans need instead to go on the offensive on health care and reframe the issue with broader package advancing free market health reforms. This package would be based on the theme of expanding freedom of choice and personal control in health care, solving the health system’s problems in the process.

This would include making Medical Savings Accounts available to everyone. It would also include a deduction for the direct purchase of health insurance by families and individuals, allowing the currently uninsured the same tax break as those who receive insurance from their employer. These provisions would substantially reduce the cost of buying health insurance for children and everyone else.

These components can then be paid for by block-granting Medicaid to the states and limiting the growth of its expenditures. States should be explicitly allowed to use Medicaid funds for vouchers and risk pools for the uninsured. States could then design their own programs to aid the uninsured in buying insurance at the income levels they choose but with their own funds supplementing a fixed federal Medicaid contribution.

These proposal would effectively ensure health care coverage for everyone, children and adults. Under that package, those who have insurance would be assured of keeping it under already enacted provisions for guaranteed renewability and portability (though current portability provisions need improvement). Those who don’t have the money for insurance would get assistance through the new block-granted Medicaid program. Those few who are too sick to buy private unsubsidized insurance would get coverage through each state’s risk pool.

Everyone would then be able to get needed coverage, with MSAs as the best way to control health costs to boot. These goals, moreover, would be accomplished by reducing taxes and government spending, producing increased economic prosperity for an in the process.

But I guess the Republicans can’t figure out how to win with that.

Peter Ferrara is general counsel and chief economist at Americans for Tax Reform and an associate policy analyst at the Cato Institute.