I recently had a chance to chat with David Walker, former comptroller general of the United States, founder and CEO of the Comeback America Initiative, chairman of the U.N. Independent Audit Advisory Committee, and one of the nation's foremost authorities on public finances. He's been an outspoken deficit-reduction advocate for the past decade. I wanted more details.
Morgan Housel: David, where are we headed if the federal budget stays on the track it's on now?
David Walker: The United States would end up having debt levels equal to Third World nations within the next 20 years if we do not change course. There's absolutely no question that based upon our current path interest rates will rise over time, inflation will increase, and the dollar would see a dramatic decline unless we start to put our federal finances in order. No question.
Housel: No question, but we've known about these threats for years, and addressing them seems perpetually stuck on the back burner. Do policymakers and the general populace have an appropriate sense of urgency?
Walker: The American people are way ahead of their elected officials on this. They know that you can't spend more money than you make at increasing rates without facing a day of reckoning. Their voices were raised in the midterm elections … and it's important that they be heard. They've had to make tough choices in their own finances; it's time for the federal government to start making tough choices.
Housel: To counter that point, a recent survey conducted by the Tax Policy Center found that 75% of Americans think entitlement programs will cause major economic problems, yet two-thirds are opposed to benefit cuts, and over half are opposed to raising taxes. I see polls like that and I wonder if the moral will is really there.
Walker: Well, a lot of these surveys and public opinion polls are fundamentally flawed. ... People's natural human reaction is, "No, I don't want you to [cut my benefits]." Of course they don't, if you don't provide any other context. You have to demonstrate to the American people that doing nothing is not an option.
We're going to need to cut and constrain spending. We're going to need to reform Social Security and Medicare and Medicaid. We're going to need to rationalize our health-care promises and figure out ways to reduce health-care costs and the rate of increase in those costs. Social Security is going to need to be more solvent, secure, and savings-oriented. We're going to have to engage in comprehensive tax reform that will also involve more revenues.
We're going to have to do all of those things. We have to. And so when you help people understand the consequences of doing nothing -- it's simply not an option -- and that ultimately we need to have a plan where the math works, I think you would get different answers to a lot of those questions. I know I do. I've been to 40 states and over 400 events in the last 2.5 years, and when you provide the contextual sophistication to people, when you state the facts, speak the truth, talk about the tough choices, people get it. And they're willing to allow some of these things to happen. But they want to make sure the specifics are done in the right way, in the right order, and that any sacrifices that they make will not be in vain.
Housel: So let's talk about those specifics. Social Security: What's the fix?
Walker: First, Social Security should remain primarily a defined benefit program for a variety of reasons. We should strengthen the benefit, meaning raise it, for people near the poverty level, and provide somewhat less of a benefit for middle- and upper-income individuals. We should also gradually increase the normal and early retirement ages while providing some exception for people in occupations where it's unrealistic to expect them to work longer. We should raise the taxable wage-base cap -- the amount of income subject to taxation -- but not eliminate it. And we should also add on an automatic savings account, 2%-3% of pay, that would be a supplement to the defined benefit program. That would help get our savings rates up, which it needs to, and it'd provide a pre-retirement death benefit, and a supplemental retirement benefit as well.
Housel: Where would that 2%-3% go? Would it have to go in Treasuries, or could people invest it as they wish?
Walker: It would be something similar to the Federal Thrift Savings Plan, where individuals would be provided several investment options, and they would decide how the money would be invested. It would be their money. It would be locked up until death, disability, or retirement. At those events, a significant majority of the fund would be paid in a monthly income stream throughout the remaining life of the individual.
Housel: The Congressional Budget Office says switching from wage indexing to price indexing could in itself result in long-term Social Security solvency. Do you think this is a viable option?
Walker: That's called progressive wage indexing, and what it says is that for people near the poverty level you index their benefits based on wages, and middle- and upper-income people, you index their initial benefit based on prices. It could work, but it's very complicated. There are simpler ways to get it done. The bottom line is that we need to provide a greater relative benefit for people near the poverty level, and less for others than the current system offers. There are several ways to accomplish that, one of which, as you note, is progressive wage indexing, another of which is just to change the formula for which you calculate benefits for lower-income, middle-, and upper-income individuals.
Housel: How about Medicare?
Walker: First, we need Medicare and Medicaid reforms to take place at the same point in time. We also need comprehensive health-care reform to the broader market that will achieve a number of objectives.
With regard to Medicare, one of the first things that we need to do is not provide huge taxpayer subsidies for middle- and upper-income individuals who voluntarily sign up for Medicare's program Part B, which is physician and outpatient care, and Part D, which is prescription drug coverage. Under the current law, the average subsidy for people who voluntarily sign up for those programs is 75%. It makes sense to provide a 75% subsidy for people who are not well-off, but it makes no sense to provide it for people who are wealthy -- some of whom are extremely wealthy.
Secondly, for Medicaid, we need to understand the fundamental difference between health care and long-term care. Medicaid is now increasingly becoming a long-term care program. And long-term care is not health care. It's life maintenance. It can be planned for. One can insure against it, and one can save in the event that one suffers the related cost. We need to dramatically transform how we deal with long-term care in this country.
With regard to comprehensive health-care reform, we need to do a number of things. First, we have to rationalize how much universal health care is appropriate, affordable, and sustainable. The government has way overpromised in health care. It is not going to be able to deliver on all its promises. We need to provide more preventative and wellness and catastrophic care to everyone as a universal coverage with options to get more if they want. We need to move away from the fee-for-service payment system toward more evidence-based medicine -- not only for payment systems, but also as a safe harbor against malpractice litigation. We need a budget for how much the federal government will allocate for health care, like every other major industrialized nation. And we need to help individuals have more incentives with regard to their own health and wellness in order to control costs, coupled with more transparency both in costs and quality. People need to know what they're getting and how much it costs.
We need to do all those things. And it's going to take a number of years to be able to make all the changes that are necessary. From a practical standpoint, given the tremendous amount of time and effort that was put into health-care reform over the last year and a half, it's probably going to be 2013 before we see the next round of comprehensive health-care reform.
Housel: At a conference in July, you spoke of differences between Canada's health-care system and ours, mostly noting how Canada's system is fiscally viable and ours isn't. What other countries have public health-care systems we can learn from?
Walker: Oh, many that we can learn from. But there is no other country that is ideal for the United States. We're going to have to craft a uniquely American solution to our health-care challenge, recognizing that there are significant differences in cultures between different countries.
I think one thing that people don't understand is that even in countries that have national health insurance systems such as the United Kingdom and Canada, have two systems: There's the national health insurance system, which is universal, and then there's a private system where employees and other individuals have access to physicians, in some cases the same physicians who work for the national health system, for an extra fee in order to gain more timely access to the health-care system, or to gain access to services that otherwise might not be provided to them through the national health-care system. They have both private and public systems. It's not one or the other.
Housel: Do you have hope we'll get any of this done?
Walker: I'm an American, therefore I'm an optimist. And if I didn't believe that we couldn't get this done, I wouldn't be dedicating a majority of my time to trying to help make sure that we do. I believe that the choices that we make or fail to make within the next three to five years will largely determine whether our future is better than our past, and I'm going to do everything that I can to make sure that we make the right choices. Not just for my country, and not just for me, but for my children and my grandchildren.
Housel: David Walker, thank you.
Walker: My pleasure.
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