April 30, 2011
Personal Responsibility is the GOP's Winning Issue For 2012By Bill Wagner
Job One for a leader is vision and strategy; policy and programs follow, not the other way around. Debt and deficits are important, but by focusing everything on green eye shade/inside the Beltway/size of government calculations, not only is the GOP not presenting the positive pro growth implications of fiscal responsibility, it is completely missing the big picture of who we are and what type of country we want to live in. We can certainly disagree with the class warfare vision being articulated by the current Administration -- tax the successful, redistribute wealth, steer the country toward equality of outcomes not opportunity, and expand the role of the government -- but at least they are clear about it.
What is missing is a counter vision that recognizes this is all about freedom and who ultimately controls choice -- we the people, or the government. The simple fact is that there aren't enough of the so called "rich" to fund the grand plans of the social engineers. Inevitably, tax increases to pay for it all will find their way to the middle class. The more folks who pay in, the less differentiated benefit they will get, so we will eventually find ourselves in the position that "government" is taking money from everyone, only to shuffle it around, extract its stay in power fees, and return it to the same folks who just sent it in, as long as they act in a government approved manner. The field will be leveled, with the government making more and more of the decisions for us, and individual freedom will become a distant memory. It doesn't take a lot of imagination to see this coming if we simply look back at the last generation of entrenched entitlement programs.
After watching what our elected officials call negotiations over the budget and debt ceiling, I am convinced that the current process is on the wrong track, and nothing less than a complete redefinition of the role of government away from the nanny state trend and back to a renewed era of personal responsibility is needed to alter the landscape. It is the umbrella philosophy that must be embraced to bring the country back to our founding principles of personal liberty. If that is not the kind of society we choose to have, so be it; but we should not pretend that we can maintain our personal liberty while allowing ever more control over the big three of health, retirement, and education to be given over to "someone else." In an era of pure tactical politics, the odds of a GOP leader emerging who embraces this concept as the centerpiece for a true election contrast are slim, but for anyone who wishes to try, and would enjoy drawing the smirks of the establishment and the eye rolls of the political advisor crowd, here is the beginning of a road map.
Besides interest and defense, which are truly the responsibilities of government, the biggest federal and state budget items are Social Security, health care, and education. And it's the lack of individual responsibility fueled by the disconnect between supplier and consumer that is the primary culprit in the exploding size of these expenditures. Discretionary expenditures, including funding for all cabinets and agencies, accounts for only about 20% of everything; and we've seen how difficult it is to lop off a tiny fraction of that, even with GAO cover that several hundred billion is simply wasted. A significant attitude adjustment in the areas where the real money is will be the only hope.
So, let's start with Social Security, the original intent of which in 1935 was to provide a kind of social insurance policy that would protect the needy from poverty in old age; this lines up perfectly with a conservative view that the role of the federal government should be essentially limited to defense, protection of sovereignty, managing the justice system, tending to the roads, and seeing that the truly needy are provided at least some sort of basic support. But over the years the train went off the rails.
As the Social Security tax-paying work force rapidly expanded relative to those that were entitled to receive benefits, Social Security became a huge source of revenue for general purposes. Over the years, politicians have fostered an image of Social Security as some kind of pension plan, with expectation that all the money we have paid in has created a pile of assets sitting somewhere to meet the eventual obligation. In reality, it is neither a welfare payment, nor technically even a contractual pension liability since Congress can eliminate it any time with the stroke of a pen. A giant Congressional ATM might be a better description, but that is about to change.
The trust fund shell game will continue for a while until the payouts exceed the tax receipts, at which point all will realize that funding must come from somewhere, and either taxes will be raised or benefits cut substantially to balance the system. Yet even then the fiction that Social Security remains a guaranteed pension plan will persist, and we will be back in the soup at some point thanks to the relentless march of demographics. All thanks to the unwillingness of Congress to give up its cash cow; and the folks to accept personal responsibility for retirement, and deal with the reality of hard choices.
Further, and this will be a recurring theme, most folks don't even think about the mechanics/rationale of Social Security; the tax is withheld so they never see it or miss it -- wouldn't life be different if everyone had to write a tax check every month. And most have come to view the payouts as they would the pension plan that actually invests funds from paychecks and has a contract to have the money make a u-turn at some point -- some type of defined benefit plan. What if the government simply got out of the pension plan fiction business and reverted Social Security to its original purpose?
Since folks have planned their retirements in part on the current program, it would have to be reduced over time, but here are the elements: leave everyone over a certain age (50-55) with the program as it currently exists (subject to whatever changes Congress would have enacted anyway); for everyone else, pay out a lump sum equal to the amount already contributed grown at some modest rate of return; create a tax sufficient to provide for the needy in advanced age based on definitions of need and actuarial assumptions. Then everyone is responsible for their own retirement funding, cushioned only by the Social Security safety net as originally designed. Others have argued that you get to the same basic place by means testing, but that still leaves the government in control.
Next is health care. Again, there is a proper role of government within a conservative philosophy, to provide a safety net in health care for the truly needy; but beyond that, health care should be determined by the private market. It is simply too complex to lend itself to central planning regardless of one's political persuasion. The first step in repositioning health care as an individual responsibility is to have the system connect buyers and providers directly. With most health insurance provided through payroll deductions, most plans provided by employers, and most coverage mandated by regulations, the vast majority of health insurance policy holders have no idea what coverage they have and what they are paying for it.
Allowing the free private market to work by at minimum equalizing the tax treatment of insurance premiums, eliminating mandates to allow more custom design of policies, and permitting insurance competition across all state lines would put the cost/benefit decision directly into the consumers' hands. Both the services provided and the costs would find their true competitive level. If an educated public knew that it was personally responsible for health care, then they could plan accordingly over their lifetimes so that the counter argument that "older" folks would be priced out of the market if it were not for government wouldn't hold.
Two recent experiences of mine drove these points home. First, I am self-employed and have private individual insurance. The notice I received about next year's premiums included a 44% increase. When I asked my agent why, he said well the new ObamaCare mandates particularly for extended coverage and elimination of lifetime caps are causing everyone's premiums to go up in the near term; but he assured me that my annual wellness doctor visit was now "free"; need I say more? Eventually after way too many hours of exploring alternatives, I found one that was similar to what I was paying last year, but it shouldn't be this hard.
The second was even more enlightening. After years of deteriorating eyesight, my doc and I concluded that cataract surgery was in the cards. Since my individual policy had a high deductible I wanted to find out how much I would be out of pocket for the procedure. I went in to my surgeon's accounting office and asked the nice young chief accountant just how much my surgery was going to cost. She hesitated for a few seconds and then actually said...gee, I really don't know; no one has ever asked me that before; case closed.
It will likely take some time for the generation of folks who have not comparison shopped for health insurance to understand how to, and certainly a transition period and exemption of those close to retirement age who have planned their lives around expected government assistance will be part of the solution, but necessity has a way of focusing the brain. Health care is perhaps a tad more important than say buying an iPhone, which folks agonize over, and I have faith in people to figure it out in a way best for each individual. Get the government out of the health insurance business, except to subsidize insurance purchases for the needy, open insurance to full competition, and let the consumer choose.
Finally there's education, which is really a referendum on the use of property taxes. In most locales the bulk of local taxes goes to education; in my town, the percentage is close to 80%, and the amount has tripled in the last 10 years. And yet, in a good year only about 20% of our residents vote; and when polled, nearly 2/3 of our residents say the property tax level was "about right." Why is this, when less than 25% of the families have children attending town schools?
Probably a combination of reasons. First, because most folks have property taxes included in their mortgage payment, it gets lost in the shuffle as part of the price of living in the town; there's that consumer/provider disconnect again. Historically, when nearly everyone had kids, families rarely moved, and the funding needed to run a town was minimal, there was some logic in the older generation's subsidizing the younger with kids in school; a sort of moral obligation to the next generation. It was just part of the cycle that evened out over the course of a lifetime, and size of property ownership was a decent proxy for some form of progressive support.
But now, those circumstances no longer generally apply -- fewer families have school age children, and mobility is more prevalent. What possible logic is there for me with no kids to write a big check to my neighbor just because he has kids in school? Now, I really like my neighbor, but probably not that much. The usual argument is that I benefit from an educated population, but so does my neighbor whom I am subsidizing.
With such huge bucks at stake, it's little wonder that those with kids tend to show up and vote, primarily for ever expanding school budgets; and without the discipline of consumers directly bearing the brunt of the cost of the service, there is little incentive to hold the school board and the local legislators that support it accountable. Why our town residents don't feel used remains a mystery. But perhaps part of the answer is the standard retort that those against budget increases must be anti-child; or if we cut back on education budgets, real estate values would plummet as families with kids moved to the next town. That may be a classic prisoner's dilemma, but never really tested for validity. Perhaps if we radically changed the way local schools were funded from general property taxes to that not so unique concept popular in the private sector called "tuition," it might focus the mind of those directly impacted and lead to more fiscal discipline. To be sure, we should find that level of taxation support to the needy that would sustain universal education opportunity, but beyond that, let the consumer of the service pay for it.
The common thread throughout is the disassociation of the costs and benefits of these programs; and the drift of society away from personal responsibility toward letting "someone else" do it. That someone is the "government," but what seems to fall through the cracks is the fact that the "government" is us. It's just folks, and by ceding authority over key aspects of our lives like retirement security, health care coverage, and education to others, we lose freedom and control over our lives.
The last generation has seen a steady creep in this direction to the point where reversing the trend will be painful. But the alternative is to wake up 20 years from now and have major choices in our lives being completely in the hands of others. Again, there is no all knowing entity called "government." It's just people, and would anyone in their right mind agree to simply turn over control of key aspects of their lives to some random party picked out of the phonebook, or even an "elected" official? True, elections give us some opportunity to know who is making decisions for us in certain areas, but as these programs become more an indelible part of the landscape, the more they are institutionalized into the bureaucracy where we have no idea who is really calling the shots -- except that it is not "us."
The hard part will be the transition, since most of the decision processes associated with Social Security, health care, and education have already been ceded to others to some degree. Recapturing personal control will take time, reeducation, and a mindset shift, which may take another generation to fully turn. The truth is that there are never going to be enough folks at the top end of the income scale to fund government's redistribution and power grab aspirations. Without a rollback to personal responsibility, all that will happen is that everything will default to the mediocre; and everyone will eventually lose a big part of what makes us who we are, and makes our country what it should be -- the ability to choose for ourselves.
Bill is a recovering investment banker and has been a private investor in, and advisor to, emerging growth companies for the past 15 years.