Hoover Daily Report

Finding The Money For America The Fixer-Upper

via Wall Street Journal
Wednesday, April 6, 2016

Common sense and careful observation tell us that the water systems, roads and many other parts of America’s infrastructure are badly in need of modernization and repair. The residents of Flint, Mich., certainly experienced firsthand their city’s crumbling water system. Americans who travel by car this summer will dodge potholes and bounce over uneven roads, highways and outdated bridges.

With all the taxes Americans are paying, why is our public infrastructure in such bad shape? Where can we find the resources to fix it?

The answer to both questions is the same. Rapidly rising expenditures on entitlement programs by all levels of government are squeezing out needed public investments. At the federal level, Social Security and Medicare are the primary causes of the squeeze. At the state and local levels, soaring public-employee pensions, Medicaid and welfare are the culprits. Even the military is seeing the squeeze from its own high retirement and health-care costs.

According to the federal government’s national income statistics, since 2003 expenditures on major entitlement programs by all levels of government have risen 15% faster than revenues. At the same time, according to the Congressional Budget Office, public infrastructure spending adjusted for the price of materials used in construction has declined by 9%. Reductions have occurred at the state and local levels of government as well as at the federal level.

The squeeze is about to get a lot tighter. As the Federal Reserve transitions from near-zero interest rates to more normal rates, the burden of the government’s high debt will take a substantial bite out of the federal budget. Larger numbers of baby boomers collecting their federal, state and local retirement and health-care benefits will take an even larger bite.

Entitlement restraint, which is necessary to ensure the nation’s economic health, can also free up resources to rehabilitate public infrastructure. Shaving just 1% off the growth in entitlements would free up $100 billion annually after four years. We estimate that shaving 2% can free up enough money to double federal transportation spending.

Significant savings are not hard to get. Let’s start with Social Security. First, change the method of calculating initial benefits for future retirees from wage to price indexing, taking effect, say, for those now younger than 60 so that future retirees have time to adjust. No current retiree would be affected. Future retirees would still be guaranteed a Social Security benefit protected from inflation.

Second, continue the current policy of raising the age for full benefits to 67 and keep it going by indexing that age to changes in longevity. Also, give people an incentive to stay in the labor force longer by eliminating the payroll tax for those who have reached the age of full benefits. The modified Social Security program will be a better deal for younger people than worrying about the system being bankrupt by the time they reach retirement age.

These changes will help to ensure that Social Security continues to meet the primary goal that President Franklin Roosevelt set for the program 81 years ago; namely, that monthly benefit levels provide “some measure of protection to the average citizen and to his family against . . . poverty-ridden old age.” The changes will also go a long way toward ensuring that benefits can continue to be paid without substantially relying on general fund revenues, thereby meeting FDR’s stated objective that the program not become “the same old dole under another name.”

There are trends in the health-care system that, if encouraged sensibly, can result in a major improvement in Americans’ quality of life and the cost of health care. Our scientists, with a lot of help from National Institutes of Health funding, are teaching us more and more about how our bodies work so that more and more people can take better control of their own health. Gradually, lower-cost prevention can replace higher-cost treatment.

Health-savings accounts, which allow individuals to set aside money tax-free for out-of-pocket health-care expenses, can be expanded to encourage this development. They should be made more broadly available, allowing those who administer Medicare and Medicaid to provide adequate HSAs to their clients. The result can be universal coverage that puts consumers, rather than bureaucrats, at the center of the system.

Just as the federal government has politically difficult but conceptually easy work to do, so do the state governments. All too many of them have overpromised pensions and health care to retirees, and these entitlements need to be brought under control. The same basic ideas can be helpful here. While federal dollars are important, funding and control are even more important at the state level. We need a coordinated effort. The entitlement fix is not hard to conceive of, but it takes real political effort to do what is obvious.

The money can be there if we exercise common sense. As our bold boss, Ronald Reagan, once told us, “there are simple answers, they just are not easy ones.” So let’s put on our hard hats and get on with it.