Thursday, September 13, 2012

What is (an) Entitlement?

Let's manage financial liabilities and long-term commitments

Download or print from Google Documents

en•ti•tle•ment noun from
  1. a) the state or condition of being entitled b) a right to benefits
  2. a government program providing benefits to members of a specified group; funds supporting or distributed by such a program
  3. a belief that one is deserving of or entitled to certain privileges
Last weekend a voter said to me, "They call Medicaid an entitlement but they call tax breaks ..." She hesitated so I offered, "Incentives?"

Fast forward 24 hours. Another voter asked about my proposal to eliminate the deduction for mortgage interest. I posed the question: "Let's say you and I have the same income – you rent, I have a mortgage – should I pay less tax?" He didn't respond. I answered my own question: "No, we must be taxed equally."

Government programs that convey a benefit or favoritism engender a sense of entitlement. And beneficiaries don't want it to end. That's why Congress is at a standstill. Medicaid, Medicare, and Social Security. Farm subsidies. Tax breaks for mortgage interest, employer provided health insurance, capital gains and dividends. Veterans programs for education, housing, and life insurance. Each program has its constituency and proponents.

Most of these programs have long-term and indefinite budget consequences. Social Security eligibility is age 62.  Total Social Security benefits paid aren't determined by the taxes you paid but how long you live. The government doesn't know its liability for veteran education benefits until a veteran starts going to and completes school.

At some point in our nation's history, these programs didn't exist. Does that mean we roll them all back immediately? No – that would have significant consequences for people's long-term plans. So how do we transition from a system of entrenched favoritism and long-term expectations?
  • For Medicare and Social Security:  Maintain current commitments to current beneficiaries, but begin to narrow the range of eligibility for future beneficiaries by increasing age and income requirements.
  • For veteran programs:  Maintain current commitments to current beneficiaries, but immediately transition new service members to higher pay and defined-contribution programs.
  • For income security programs:  Mandate work, education, or training requirements that lead to graduating from the need for income assistance.
  • For income tax breaks:  Lower rates to offset the loss of credits and deductions with one notable exception for mortgage interest.  In my tax proposal I suggest phasing out tax breaks for existing retirement plans and allow an annual tax deferral of $25,000 on new savings and investment; existing homeowners may apply their mortgage interest toward that deferral but new homeowners may not.
  • For programs that distort markets such as agriculture or energy subsidies:  End them immediately.  (The mortgage interest deduction also distorts markets, but needs special handling.)
Good businesses know their current finances and future liabilities with certainty. It's time for good government to do the same.