The authors of On the Edge skillfully unravel the mess our political leaders have gotten the nation into over almost 100 years, providing straightforward explanations and direct, simple solutions to the nation’s entitlements crisis.
The “entitlements cliff” of the book’s title is the fact that our social insurance programs are financially unsound and our income redistribution programs are unaffordable.
Describing 84 social insurance and means-tested welfare programs, Mark Litow and Merrill Matthews focus on the biggies with which we are all familiar: health care, Social Security, public employee pensions, and cash welfare.
Fiscally Unsound Premises
Employers and employees contribute to social insurance programs, and many retirees pay premiums for Medicare. Over the years, however, politicians have increased the benefits faster than the taxes and premiums dedicated to fund these schemes. They have also added new groups of beneficiaries whose benefits are subsidized by other participants or taxpayers in general.
In managing Social Security, health care, and pensions, the government never follows the prescription that allows insurance companies to stay in business while insuring all kinds of risk. Insurance companies do it by practicing actuarial science, which is the quantification of risk using math, probability, and statistics. In the end, to stay in business for long, income must equal or exceed expenditures.
Unfortunately, with only rare exceptions, government safety-net programs are set up and later expanded based on political considerations instead of economics and actuarial science.
“Finding a U.S. entitlement program that has remained the same over time is about as difficult as finding one that will be solvent over the long term,” the authors write.
Explosion in Spending
Litow and Matthews concisely describe how Medicare and Medicaid exploded in cost.
Medicare’s “unfunded liability had been estimated by the trustees in 2009 at about $90 trillion,” they write. Then came the Affordable Care Act, which subsidized health insurance premiums for non-seniors, expanded Medicaid eligibility, and undermined Medicare by imposing cuts in price-controlled reimbursements to hospitals.
In 2012, the Actuary estimated that by 2080 Medicare’s hospital expenditures could rise to 9.9 percent of all taxable payroll and that payments to physicians could mount to nearly 4.39 percent of the nation’s gross domestic product.
“Medicare is in much worse financial shape than Social Security, and Medicaid consumes an ever-expanding percentage of federal and state budgets,” the authors write.
‘Financial Malpractice’
Litow and Mathews do an excellent job of explaining the disaster of unfunded pension programs for public employees. “Many states are facing unfunded liabilities far beyond anything they can cover without dramatic changes,” they write.
A recent study shows the unfunded liabilities for state employee pension plans are $6 trillion.
“For example, according to the American Legislative Exchange Council, Connecticut’s unfunded pension liability in 2017 was $248 billion, New Jersey’s was $249 billion, Illinois’s was $388 billion and California’s was $988 billion—almost $1 trillion,” Litow and Matthews write.
“These shortfalls are nothing less than financial malpractice,” the authors write.
Losing War on Poverty
In case you have any warm feeling for former president Lyndon Johnson and his initiation of our War on Poverty, you will learn it only made things worse, and not for lack of money.
“In 2017, we calculate that states spent nearly $500 billion on means-tested welfare programs,” the authors write. “Adding state to federal means-tested spending brings the total to about $1.1 trillion.”
The authors estimate we have spent $29 trillion on antipoverty programs in the United States with little to show for it to date. The poverty rate “has fluctuated between 11 percent and 15 percent for 50 years, and [stood] at about 12.7 percent in 2016.”
Solution: Temporary Safety Nets
The key to a solution to this fiscal mess is to differentiate safety nets that will help those in temporary need from those in need of permanent help and to create programs that incentivize getting back to work instead of encouraging people with low incomes to stay in need, the authors argue. A good program must separate the able-bodied from those not so fortunate.
Litow and Matthews stress the principles of the Society of Actuaries, which are to make programs available only to those in need, with meaningful benefits that are fiscally sound. The authors recommend combining private and public funding based on a free-market platform with incentives for recipients to leave the government’s safety-net system.
Solution: Individually Owned Accounts
Most federal entitlement spending is on Social Security and Medicare, costing $1.63 trillion per year by the authors’ estimate. The only way to solve these programs’ financial challenges is to move to a system of accounts owned and controlled by the individuals, not the government, the authors argue.
Litow and Mathews suggest several ways to address the inherent risks that come with people managing their own accounts and occasional stock market declines. They also offer simple models to create actuarially sound safety-net, health care, and welfare programs.
Sadly, the authors’ solutions are not likely to happen given the power of advocacy groups that benefit from government ineptitude.
This well-thought-out book offers a set of solutions that could solve the long-term fiscal and economic problems we face—if ever we can get the government to stop kicking the can down the road.
Jay Lehr, Ph.D. is senior policy analyst at the International Climate Science Coalition.