Our paralyzed government is lurching toward an agonizing series of budget deadlines. Without some kind of deal, nearly $1 trillion in across-the-board spending cuts will kick in on March 1, the federal government could shut down on March 27, and the nation could default on its debts in May. On Tuesday, President Obama called the looming cuts, known as the sequester, a “meat-cleaver approach” as he urged Republicans to accede to higher taxes.
The search for an elusive grand bargain–more taxes, fewer benefits–may be blinding us to the potential for incremental progress. The two parties fundamentally disagree over the future of our welfare state, but there may be space for common ground.
Democrats want to close the budget gap by having the government lean more heavily on the wealthy, while Republicans want to close it by having the government spend less money. Both sides should agree at least to spend less money on the wealthy–via means testing. It may surprise some Americans to learn that the United States spends quite a lot on the affluent, especially through the entitlement programs at the heart of the budget fight: Social Security and Medicare. Both programs move money from relatively poorer young people to relatively richer old people, and they are growing ever more expensive. Means-testing–allocating benefits according to need–might offer both sides a way out.
The approach would require agreement on two principles. First, give less to the wealthy rather than take more from them. For Medicare, such means testing would mean giving prosperous older people fewer benefits rather than charging them higher premiums for the same benefits other elderly Americans get. Charging wealthy older Americans more, and then giving money back to them through an expensive and inefficient benefit, makes no sense. The goal should be to better target public benefits to those who need them.
Second, assess wealth based on lifetime earnings rather than on income or assets–the latter would discourage saving, and working past retirement age, as well as invite tax evasion and benefits fraud, as demonstrated by the abuse of Medicaid’s long-term care benefit. Basing benefits on lifetime earnings, on the other hand, would encourage saving over time, would be far more difficult to game and, provided it was based on pre-retirement earnings, would not discourage older Americans who are able to work from continuing to do so.
While many liberals oppose raising the Medicare age of eligibility, doing so on a means-tested basis would address most of their concerns while saving lots of money. For older people with the greatest lifetime earnings, the eligibility age could gradually rise to 70 from 65.
Such a reform would begin to treat Medicare less as a universal earned benefit and more as the transfer program that it effectively is. It would take account of the increases in longevity among the well off (which have been almost entirely absent among the poor). It would not merely pass new costs along to other government programs–because the rich generally aren’t covered by other benefits, already have or can afford insurance and could bear the cost of waiting for Medicare through their personal resources or by working longer (as so many already do).
In Social Security, there are even more opportunities for means-testing. Andrew G. Biggs of the American Enterprise Institute has proposed having the top third of beneficiaries (by lifetime income) receive no annual cost-of-living adjustment in retirement. The middle third would get half of today’s adjustment, and the bottom third would receive the same annual increase they do now. Such a reform, Mr. Biggs found, would reduce Social Security spending by more than a tenth over a decade and fix the program’s long-term financing. (Greater annual adjustments could be made for those who reach extreme old age and are running out of resources.)
Some on the left might complain that curtailing our entitlement programs’ universal character would undermine their social purpose and political support. But targeting benefits to those who most need them is surely better than reducing payments to providers (many of whom will drop out of Medicare), as President Obama’s 2010 law does. Some on the right might complain that such reforms would punish success. But surely rewarding achievement with government aid is no one’s idea of conservatism.
The next four years are unlikely to offer political opportunities for the kinds of fundamental reforms our entitlement and tax systems require. But that should not mean that we can do nothing as our mounting debt casts a growing shadow over the nation’s prosperity. Where the potential for common ground exists, we ought to seize it.
Yuval Levin is the editor of National Affairs and Hertog fellow at the Ethics and Public Policy Center.