THE 1996 WELFARE REFORM: BUILDING ON WHAT HAS WORKED
While I was Speaker of the House, we replaced the failing Aid to Families with Dependent Children (AFDC) program, which was originally adopted in the 1930s as a central component of the New Deal. Our replacement transformed the program’s federal spending into “block grants” given to states to use in new programs they designed based on mandatory work or education for the able-bodied. The lynchpin was that the block grant is finite, not matching, so it does not vary with the amount a state spends. If a state spends more, it must pay the extra costs itself. If a state spends less, it keeps the savings.
Previously, the program’s federal funding was based on a matching formula, with the federal government giving more to states the more they spent on the program. This was like paying the states to spend more, and they did, signing up more welfare recipients and thereby bringing more federal funds to their states while creating more dependency. To reflect the new emphasis on work, we changed the name of the program to Temporary Assistance to Needy Families (TANF).
The reform reduced the old AFDC rolls by close to 60 percent nationwide and by close to 80 percent in states that pushed work the most aggressively. Millions of poor people climbed the ladder of opportunity by going back to work and making their own living.
As Ron Haskins of the Brookings Institution (and a senior legislative staff writer for the reforms in 1996) reports in his book Work over Welfare, “The number of families receiving cash welfare is now the lowest . . . since 1969, and the percentage of children on welfare is lower than it has been since 1966.”
As Haskins details, welfare reform dramatically increased employment among single mothers and never-married mothers. The total income of low-income families formerly on welfare increased by about 25 percent.
Perhaps most important, poverty rates fell steeply across virtually all age and demographic sectors. Between 1993 and 2000, child poverty rates fell every year, with African-American child poverty rates reaching historic lows. The Child and Youth Well-Being Index, published each year by Ken Land of Duke University and based on twenty-eight key indicators of child well-being, increased by 30 percentage points from 1995 to 2005.
Haskins cites a study by Isabel Sawhill and Paul Jargowsky that found,
So great was the decline in poverty that the number of neighborhoods with concentrated poverty fell precipitously, as did the number of neighborhoods classified as underclass because of the concentration of poverty and the high frequency of problems such as school dropout, female headed families, welfare dependency, and labor force dropout by adult males.1
Haskins concludes,
The pattern is clear: earnings up, welfare down. This is the very definition of reducing welfare dependency. Most low income mothers heading families appear to be financially better off because the mothers earn more money than they received from welfare. Taxpayers continue making a contribution to these families through the EITC and other work support programs, but the families earn a majority of their income. This explosion of employment and earnings constitutes an enormous achievement for the mothers themselves and for the nation’s social policy.2
As suggested above, replacing the old welfare reform system with a new model of work and education actually helped the poor by drawing them into work and out of poverty. Moreover, federal spending on the program remained flat for a dozen years, saving huge sums of taxpayer dollars. Indeed, with the big decline in the number of welfare dependents, spending on the program could have been reduced by more than half. The Democrats prevented this, however, through a provision that blocked any reduction in overall spending, even if it resulted from increased effectiveness.
These same principles should now be extended to other federal welfare programs, including Food Stamps, Medicaid, SCHIP, housing assistance programs, and other, smaller welfare programs. Indeed, the federal government operates eighty-five means tested programs providing assistance to low-income families, all of which should be turned into block grants for the states to modernize in a coordinated manner with minimum red tape.
ELIMINATING POVERTY IN AMERICA
In a new study published by the Heartland Institute, Peter Ferrara, formerly of the White House Office of Policy Development under President Reagan, demonstrates the exciting possibilities that states could achieve with their new, sweeping authority under such reform. This would take welfare reform to the next level, effectively replacing the entire system with a better-functioning, more humane, and more affordable alternative.
Ferrara proposes that states use the funds from all the block grant programs primarily to aid the able-bodied through a guaranteed offer of work. (Those unable to work would receive benefits through a separate program to help them move from disabilities to capabilities.) Those who report to their local welfare office before 9:00 a.m. would be guaranteed a day’s work assignment, in the private sector whenever possible, paying the minimum wage in cash. The welfare office would provide free daycare for participants’ small children, who would receive medical examinations and treatment when necessary.
Those who work a minimum number of hours each month would get a Medicaid voucher to purchase basic private health insurance. Those who establish a dependable work history would be eligible for new housing assistance focused on help in purchasing a home.
Earning the federal minimum wage, these workers will receive $7.25 an hour, or roughly $15,000 for a full year’s work. They would also continue to be eligible for the earned income tax credit, which is now worth $457 with no children, $3,000 for one child, and $5,000 for two children, as well as the child tax credit, worth an additional $1,000 per child. These tax credits are refundable, meaning the recipient gets these amounts regardless of his tax liability. Then there is the value of the child care and the health insurance.
More than adequate as a safety net, this system would save federal and state taxpayers enormous sums. First, private sector jobs would substitute earned wages for former welfare benefits from all the block grant programs. Thus, modern labor markets, rather than the government’s transfer of taxes, will play the primary role in providing for the poor through productively earned income.
Second, this replacement eliminates all work disincentives from welfare. Nearly the only way for the able-bodied to get assistance is to work in the private sector, whether through this program or not. This would all but eliminate long-term welfare dependency and move millions still too dependent on the government into private sector self-support and self-reliance. The government safety net would be used only for short-term emergencies.
This system would also end all incentives for having children outside marriage. Someone, either the father or the mother, will have to work to support a child, so free benefits just for having children are all but eliminated. Furthermore, there is nothing to be gained by avoiding marriage or by couples splitting up, so marriage is not discouraged—a government welfare check does not become a substitute for a working husband. The result would be substantially fewer single parent households that cannot support themselves, and far more self-supporting, married families.
By eliminating the need to maintain and investigate eligibility requirements, this system would also minimize administrative costs. If Warren Buffett wants to show up for a work assignment before 9:00 a.m., he’s free to do so like anyone else.
The ultimate payoff is this: the system would effectively eliminate real poverty in America. Everyone would have an assured job and an assured income worth roughly $25,000 to $30,000 per year or more, while the disabled would be assisted in maximzing their capabilities in a fundamentally different program.
This new work and opportunity system would be a historic breakthrough in raising up lower-income individuals and families, finally beating poverty through the tried and true principle of work.
PERSONAL ACCOUNTS INSTEAD OF THE PAYROLL TAX
Another key concept for positive, structural entitlement replacement is personal accounts for
Social Security, which would let workers substitute savings and investment accounts for at least part of the current system.
Beginning at any size, the accounts could be expanded over time until workers can choose to substitute them for all their Social Security retirement benefits. This could be accomplished using just the 6.2 percent employee share of the Social Security payroll tax, still leaving workers with close to twice the benefits Social Security promises under current law (but which in the future it will not be able to pay).
The accounts could be expanded further, eventually substituting private life insurance for Social Security survivor’s benefits, and private disability insurance for Social Security disability benefits. This could be accomplished with another 2.8 percent of the payroll tax, or a total of 9 percent, leaving workers even further ahead of Social Security’s promised benefits.
Eventually, the accounts could be expanded to cover the payroll taxes for Medicare, another 2.9 percent of wages, with the saved funds financing monthly annuity benefits used to purchase private health insurance in retirement. The personal accounts would then total 11.9 percent of wages, a direct savings of about one-fourth from the current 15.3 percent total payroll tax. With the accounts paying for all the benefits currently financed by this tax, it could eventually be phased out completely.
Contributing these amounts to the account over a lifetime, couples with average incomes would likely reach retirement with a million dollars or more in today’s dollars after adjusting for inflation. Such accounts would pay substantially more than Social Security currently promises, while still leaving enough to buy health insurance in retirement, taking over for the projected bankruptcy of Medicare. The major cost savings available through Health Savings Accounts would make this even more manageable for retirees. The general revenues that now finance over half of Medicare spending could be used to provide supplements to help lower income retirees buy adequate health insurance.
Retired workers will also be able to use a small fraction of their accumulated funds to buy long-term care nursing home insurance, protecting the rest of the funds in their account from such expenses. This would effectively privatize the major portion of Medicaid that now finances such long-term care for lower income workers. It would nicely complement the Medicaid block grants discussed above.
These accounts wouldn’t just trim the growth of government spending, they would shift huge chunks of it from the public to the private sector, ultimately reducing federal spending by about 10 percent of GDP as the personal accounts replace this spending with market financed benefits. Such spending reductions would involve an unprecedented expansion of personal freedom and personal choice.
In the process, the payroll tax would ultimately be phased out completely and replaced by an engine of personal family wealth in the personal accounts. Workers would get much better benefits through these accounts because market investment returns over time are so much higher than the returns the non-invested, redistributive Social Security system can promise, let alone what it will be able to pay in future years. Workers across the board would accumulate $1 million or more in real terms by retirement, directly owned by each worker, which could be left to the family at death. That contrasts with zero estate accumulation under the current system—a situation that especially harms African-American males who have the shortest average life spans and under the current system accumulate nothing for their family despite a lifetime of paying Social Security taxes. This would do far more to reduce economic inequality than any other single reform.
What an exciting long-term vision for America. Indeed, such a program would be another historic breakthrough in the personal prosperity of working people. Retirees would be better off for all the reasons stated above, and taxpayers would be better off because the payroll tax would ultimately be phased out. Perhaps most important, the transition to personal accounts would eliminate the long-term Social Security financing crisis.
The bill introduced in Congress by Republican Paul Ryan, which benefited from substantial input from the Social Security Administration and from experienced Wall Street fund administrators, serves as a comprehensive model of how to structure such accounts.
That bill maintains the current social safety net in full by including a federal guarantee that if any retiree’s account cannot pay at least what Social Security would under current law, the federal government would pay the difference. Because capital market returns are so much higher than what Social Security promises, however, it’s unlikely the government would ever have to pay off this guarantee, especially when workers are investing in their personal accounts through a structured framework where they are choosing among highly diversified, professionally managed investment funds approved and regulated by the government for safety and soundness. These features follow the amazingly successful personal account program adopted in Chile over twenty-five years ago. Those accounts produced higher incomes for returns and higher economic growth for the country.
The transition to personal accounts can be financed by reducing the growth of other government spending and by the increased revenues stemming from the higher savings and investment in the accounts and the resulting higher economic growth. Indeed, the other structural entitlement changes discussed in this chapter can help greatly in financing this transition. Brian Riedl and the Heritage Foundation have advocated a limit on the growth of total federal spending that would be more than sufficient to finance the transition. He has also published for Heritage lists of wasteful federal spending that should be cut, as has the Cato Institute and others, which could help finance the transition as well. The popularity of personal accounts and the need to finance the transition would draw in the public to more actively support reducing such wasteful and even counterproductive spending.
A BETTER SYSTEM IS POSSIBLE
Entitlement replacement should involve fundamentally rethinking the structure of Medicaid and Medicare. That’s also a key component of chapter fifteen on transforming the health system.
These structural entitlement replacements would solve the long-term entitlement crisis without tax increases or benefit cuts. The new, transformed safety net would serve the poor and senior citizens far better while reducing the size of government.
Now that would be change you can believe in.
CHAPTER FIFTEEN
Creating Better Health at Lower Cost
With Nancy Desmond CEO, Center for Health Transformation
ObamaCare, like HillaryCare, is a dead end of higher taxes, bigger government, more bureaucracy, and a decaying health system.
However, the American people know we need health reform. So just saying no to ObamaCare won’t do. We need to offer a better solution.
Our task is both to expose the disingenuous and destructive heath proposals of the secular-socialist Left and to promote and communicate a better system that will improve health outcomes, strengthen individual rights, and boost the economy.
It is impossible to save America without fundamentally improving our healthcare system. Morally, we cannot accept the needless death and suffering of millions of Americans each year from avoidable medical errors, preventable chronic diseases, and the lack of integrated information in our current system.
Nor can we as Americans accept a future where, according to analysts, we will be the first generation where our children and grandchildren are likely to live shorter and less healthy lives than the generations that preceded them.
Furthermore, we cannot save America without solving the economic challenges related to the costs of our current inefficient healthcare system. We cannot balance the budget or rein in the deficit without fixing what ails our healthcare system. Similarly, we can’t create jobs competing in the world market if our healthcare system is dramatically more expensive than those of our competitors.
PRINCIPLES OF A TWENTY-FIRST CENTURY PERSONALIZED MODEL OF HEALTH
The current debate over covering the uninsured is a prime example of our unfortunate
tendency to focus on only one part of the healthcare system. By concentrating on who we should tax in order to expand government coverage to more Americans, politicians are missing the real opportunity to rethink and transform the health system. The fact is, it is possible to have 300 million Americans living longer and living healthier in a twenty-first century intelligent health system with 100 percent coverage, but it requires changing much more than just financing.
At the Center for Health Transformation, we know the potential for positive transformation is enormous because we have spent years developing effective approaches and studying successful health innovators around America.f
THE GOAL OF A TWENTY-FIRST CENTURY HEALTHCARE SYSTEM: ASSURING ALL AMERICANS ACCESS TO QUALITY HEALTHCARE THAT IS AVAILABLE, AFFORDABLE, AND APPROPRIATE.
When everyday Americans consider healthcare reform, they do not focus on the nuances of insurance collectives and industry jargon. Rather, they ask the simple questions:
• Will healthcare be AVAILABLE for me and my family when we need it?
• Will we be able to AFFORD what we need?
• Will what is offered be APPROPRIATE for us?
As we consider the best way to transform our healthcare system, we must assure access includes these three elements.
Availability
There are regions of our country that don’t have a single doctor, and there are others with plenty of hospitals and clinics, but where ill people cannot physically get to that care.
A twenty-first century healthcare system must use creative initiatives like medical education debt forgiveness to train more physicians and incentivize careers in primary care, especially in rural communities.
To Save America: Abolishing Obama's Socialist State and Restoring Our Unique American Way Page 18